Assume an investor purchased a fixed-coupon bond at a time when the bond's yield to maturity was 6.9%. Further assume the investor sold the bond prior to maturity and realized a total return of 7.1%. Which of these most likely occurred while the investor owned the bond?

Question

Quizplus · Accepted Answer

The investor realized a total return higher than the yield to maturity at the time of purchase, which likely occurred because the market interest rates for new bonds decreased (as indicated by new bonds having lower coupon rates of 6.5%). This would increase the market value of the existing bond, allowing the investor to sell it at a profit, hence realizing a higher total return.

Assume an Investor Purchased a Fixed-Coupon Bond at a Time