G. Welch purchases a corporate bond that was originally issued for $1,000 several years ago. The bond has four years remaining until it matures, the market price now is $1,054.45, and the yield to maturity (YTM) is 4 percent. The bond pays an annual coupon of $55, with the next payment due in one year.
a. What is the bond's coupon rate? Its coupon yield?
b. Suppose Welch holds this bond for one year and the YTM does not change. What is the total percentage return on the bond? Show that on a percentage basis, the total return is the sum of the interest and capital gain/loss components.
c. If the yield to maturity decreases during the first year from 4 percent to 3.5 percent, what is the total percentage return that year?