Currently the 1-year spot rate is 5% and the 2-year spot rate is 6%. There is a liquidity premium in the bond market such that the expected return on a 2-year bond exceeds the expected return on a sequence of two, 1-year bonds by 0.25% per year.

Currently available in the market is a 2-year bond (annual coupon payments) that pays a 7% coupon rate on a $1,000 par value.If you buy this bond today and sell it one year from today, just after it has made its first coupon payment, what is your expected rate of return? Report your answer to the nearest basis point and use integers rather than decimals. If you think the answer is 10.25%, write 10.25, not 0.1025.