An investor with a 6-year investment horizon purchases a 10-year 2% coupon bond for an annual YTM of 3%. The par value is $1,000, and coupons are paid semi-annually. The investor expects to be able to reinvest the coupon payments at an annual interest rate of 4% and that at the end of the planned investment horizon the bond will be selling to offer a YTM of 5%.

What is the annual return of this investment? Why is it different from the YTM of the 10-year bond? Answer this question first!