Final answer:
The yield to maturity of a 5% coupon bond with one year to maturity, selling at face value, is 5%. However, even with no inflation, the bond could yield a negative return if the investor's costs surpass the interest received.
Step-by-step explanation:
The yield to maturity (YTM) of a bond is a measure of the annual return an investor can expect if they hold the bond until it matures. For a 5% coupon bond with a face value of $1,500 that is selling for its face value and has only one year left until maturity, the yield to maturity is simply the coupon rate, given that there are no gains or losses since the bond is selling at face value. In this case, the bond will pay 5% of the face value, which is $75, as an interest payment. Therefore, the YTM of this bond is 5%.
In a scenario with no inflation, a bond can still experience a negative yield if the investor incurs costs that exceed the interest earned. For instance, if the investor has to pay taxes, fees or other costs that total more than the $75 interest payment received from the bond, the investor's net return could be negative.