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 portfolio manager’s expected return if he predicts that the yield curve one year from today will be a flat 7%?

A. 4.19%

B. 6.00%

C. 8.83%

What do you think?

Why?

when the int rate increases price of the bond decreases

so the expected return would be lower than 6%

could you please explain to me how to calculate on Calci?

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What’s the price of the bond today?

What’s the price of the bond in one year.

What’s the value of the investment in one year (bond plus cash flow)?

What’s the return?

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