Final answer:
The actual return on a bond depends on the coupon rate, reinvested interest rate, and changes in market price. Therefore, the correct answer is D) I, II, and IV only. Understanding these elements can help investors make informed decisions about their bond investments.
Step-by-step explanation:
The actual return on a bond is dependent upon the following factors: the coupon rate, the reinvested interest rate, and any changes in market price. Specifically, the correct answer to the question is D) I, II and IV only.
Firstly, the coupon rate, which is the annual interest rate paid by the issuer of the bond, greatly affects the return on a bond. This is the fixed payment made to bondholders that represents the compensation for delaying consumption.
Secondly, the interest earned on the bond can be reinvested, usually at the same reinvested interest rate. This reinvestment rate is crucial since it can compound the overall returns of the bond investment, particularly if the rates are high.
Lastly, any changes in the market price of the bond affect the actual return, especially if the bond is sold before maturity. When interest rates rise, existing bonds with lower coupon rates become less attractive, and their market price drops; conversely, when interest rates fall, the market price of these bonds rises.
It is important to note that the par value of a bond does not change; hence, it does not directly affect the actual return unless the bond is sold before maturity at a premium or discount. Armed with this information, an investor can make informed decisions about bond investments.