You purchased an annual-interest coupon bond one year ago with six years remaining to maturity at the time of purchase.The coupon interest rate is 10%, and par value is $1,000.At the time you purchased the bond, the yield to maturity was 8%.If you sold the bond after receiving the first interest payment and the bond's yield to maturity had changed to 7%, your annual total rate of return on holding the bond for that year would have been

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The total rate of return includes the interest received plus the capital gain from the bond's price increase due to the decrease in yield to maturity from 8% to 7%. The interest payment would be $100 (10% of $1,000). The bond's price increase results from the present value of future cash flows being discounted at a lower rate (7% instead of 8%), making the bond more valuable. This combination of interest income and capital gain results in a total return higher than the initial yield to maturity or the coupon rate, hence closer to 11.95%.

You Purchased an Annual-Interest Coupon Bond One Year Ago with Six