Final answer:
The expected rate of return on the bond is approximately 11.71%, calculated by combining the annual coupon payment and the expected capital gain over the next year relative to the bond's current price.
Step-by-step explanation:
The student is asking about how to calculate the expected rate of return on a bond investment. To find this rate, we first note that the bond's coupon rate is 6.0%, meaning the bond pays $60 in interest annually (6.0% of $1000). Since the current price of the bond is $965 and it is expected to change to $1018 next year, we can calculate the total expected income from the bond over the next year as the sum of the annual coupon payment and the capital gain, which is $60 + ($1018 - $965) = $113. Therefore, the expected rate of return would be the total expected income divided by the current price of the bond, or $113 / $965, which gives us an expected rate of return of approximately 11.71%.