Total Returns The UK government issues a five-year bond which makes annual coupon payments of 5 per cent and offers a yield of 3 per cent annually compounded.

Suppose that one year later the bond still yields 3 per cent.

What return has the bondholder earned over the 12-month period? Now suppose that the bond yields 2 per cent at the end of the year. What return would the bondholder earn in this case? Assume the face value of the bond is €1,000 and that coupon payments are made at the beginning of the year.