6.5 The 5% coupon bond with maturity 2011 starts with 3 years left until maturity and sells for $1,081.95. At the end of the year, the bond has only 2 years to maturity and investors demand an interest rate of 1.5%. Therefore, the value of the bond becomes PV at 1.5% + (1.015) $50 $1,050 = $1,068.46 (1.015) You invested $1,081.95. At the end of the year you receive a coupon payment of $50 and have a bond worth $1,068.46. Your rate of return is therefore Rate of return $50+($1,068.46-$1,081.95) $1,081.95 = .0337, or 3.37% 6.6 The yield to maturity at the start of the year was 2.15%. However, because interest rates fell dur- ing the year, the bond price rose and the rate of return was greater than the yield to maturity.