Predicting Yield curve
While going through CFAI books, I got confused on the explanation. Here is the question and solution:
Assume a flat yield curve of 6%. A three-year £100 bond is issued at par paying an annual coupon of 6%. What is the bond’s expected return if a trader predicts that the yield curve one year from today will be a flat 7%?
A is correct. Expected return will be less than the current yield to maturity of 6% if yields increase to 7%. The expected return of 4.19% is computed as follows:
So, why we do not discount the first coupon payment ? to my understanding, we should discount the first payment 6 by 1.06.
Could anyone explain me where I got lost ?
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