Question

An investor purchased a fixed-coupon bond at a time when the bond's yield to maturity was 6.9%. The investor sold the bond prior to maturity and realized a total return of 7.1%. Which of these most likely occurred while the investor owned the bond?

a. Market interest rates declined.
b. Market interest rates increased.
c. The inflation rate increased.
d. The bond's current yield increased above the bond's coupon rate.

Answer 1

The most likely occurrence is that market interest rates declined, leading to an increase in the bond's price, which in conjunction with the interest payments, resulted in a total return higher than the initial yield to maturity.

Step-by-step explanation:

The student asked a question about what is most likely to have occurred when an investor who purchased a fixed-coupon bond with a yield to maturity of 6.9% realizes a total return of 7.1% upon selling the bond before maturity. The correct answer in this scenario would be that market interest rates declined. This is because the total return not only includes interest payments but also any capital gains (or losses) realized on the sale of the bond. If market interest rates had fallen since the bond was purchased, the bond's price would likely have increased, as the fixed-coupon payments would be more attractive compared to the new lower market rates. This appreciation in bond price, combined with the interest received, would contribute to a total return higher than the bond's initial yield to maturity.

Answer 2

The Correct Answer of the given scenario is A "Market interest rates declined"

Step-by-step explanation:

Financial specialist bought the bond at YTM of 6.9%, and acknowledged return of 7.1%.

This arrival will involve coupon return and capital increase return.

Financial specialist will have capital addition just when security costs will increment, and to expand security value, advertise loan fee declined.