Final answer:
Actual returns on bonds often differ from the expected Yield to Maturity due to credit spread changes, reinvestment risk, duration mismatch, and inflation variations, which are key factors affecting the total rate of return.
Step-by-step explanation:
The Discounted Cash Flow (DCF) method sets expectations for fixed income returns, but actual return often differs from Yield to Maturity (YTM) due to various factors. One key reason is credit spread changes, which affect return as the perceived riskiness of a borrower alters, leading to changes in the spread between the risk-free rate and the rate on the bond. Another factor is reinvestment risk, the uncertainty around the returns from reinvesting interest payments or principal at the same rate as the original bond. Duration mismatch may occur when the investment horizon doesn't align with the bond's duration, leading to differences between expected and actual returns, particularly when interest rates change. Lastly, inflation variations can affect the real return on a bond investment, as inflation rates may not align with the expected rates factored in at the purchase time.