(Mock 2014 version c) To calculate the total return on:

a bond with a beginning price of $103, a 5% semiannual coupon, an expected price at the end of one year of $102.5, and an annual reinvestment rate of 2%.

Step 1: The total value in 1 year = 2.5 + 2.5(1+2%/2) + 102.5 = 107.525

Step 2: The semi-annual return = (107.525 / 103)^0.5 - 1 = 2.173%

Step 3: Total return = 2.173% * 2 = 4.3459%

Can anyone explain why we need to “semi-anuallize” the return in step 2 and then double it to get the total return?

Why is it not right to just do 107.525/103 - 1 = 4.39%?