BONDS
Does a 5% coupon mean a 5% one-year return?
Coupons are one source of income, not the whole holding-period return. Change the exit yield to observe the price effect.
You receive 50 in coupons: what is the return after a yield change?
Purchase 1,000, 5% coupon, ten-year maturity. Hold one year, semiannual coupons, reinvest at 5%. Change the exit yield.
Four measures answer different questions
- Coupon Rate
- Contractual annual coupon / face value. Coupon 50 on face 1,000 means 5%.
- Current Yield
- Annual coupon / current price; excludes price changes and reinvestment.
- YTM
- Nominal annual yield equating scheduled coupons and maturity redemption to price. Realizing the equivalent compound return depends on payment and reinvestment assumptions.
- Total Return
- Coupons, reinvestment income and capital gain/loss over the selected holding period, divided by purchase amount.
Why might total return stay positive when rates rise?
Price may fall while coupons and reinvestment income accumulate. Their combined effect determines holding-period return. Falling rates can produce price gains and lower reinvestment opportunities; this model keeps exit and reinvestment rates separate.
Show formal definition and formula
Holding-period return combines coupons, reinvestment and sale or maturity proceeds.
Purchase on a coupon date and exit after whole coupon periods or at maturity. Each received coupon is reinvested. Taxes, fees, default and calls are excluded.
HPR = (Exit Price + Coupon Income + Reinvestment Income − Purchase Price) / Purchase Price
Annualized Return = (1 + HPR)^(1 / Holding Years) − 1
Remaining maturity = original maturity − holding years. Exit price discounts remaining coupons and principal at exit yield; holding to maturity receives face value without repricing.
Common misconception
A 5% coupon does not guarantee a 5% one-year return. Coupon rate, current yield, YTM and total return use different denominators, horizons and cash-flow assumptions.