Suppose you consider to invest in a 5% annual coupon bond with 10 years to maturity.

(a) Whatrateofreturndoyouexpecttoearnifyoubuythebondtodayat$1,060?

(b) Two years from now, the YTM on your bond has changed to 4.5%, and you decide to sell. What price will your bond sell for? What is the annual rate of return that has been generated from your investment (please consider time value of money)? Briefly

explain why this return is different from the YTM when you first bought the bond.