Updated for the 2026-2027 CFA® Level I curriculum.
A fixed-rate bond's realized return can come from coupons, earnings on reinvested coupons, and a price change. Separating the components prevents common calculation errors.
Quick Answer
Bond holding-period return equals coupon income plus reinvestment income plus the sale-price change, divided by the purchase price. The result can differ from initial YTM because reinvestment rates, horizon, and the bond's sale yield can differ from the assumptions embedded in YTM.
Key Takeaways
Coupon income is contractual if the issuer pays as promised.
Reinvestment income depends on rates earned after coupons arrive.
Price change equals ending price minus purchase price.
Use purchase price in the return denominator.
Realized return does not have to equal initial YTM.
What You Need to Know for CFA Level I
Identify all three sources of return.
Reconcile purchase price with ending wealth.
Calculate holding-period return.
Annualize only when the question requires it.
Duration-based horizon analysis and immunization are treated in neighboring notes.
What Are the Sources of Fixed-Rate Bond Return?
The three sources are coupon income, reinvestment income, and price change. Total ending wealth includes all cash received and the value obtained when the bond is sold or matures.
Coupon Income and Reinvestment Income
Coupon income is the sum of payments received during the holding period. Reinvestment income is interest earned after those coupons are placed in another investment. It depends on timing and available rates.
Price Change Over the Holding Period
Price change is . It can reflect changing market yields, credit conditions, or the bond's movement toward par as maturity approaches.
Bond Return Formula
Bond return can be measured first in currency terms and then as a percentage of the initial purchase price. If the holding period spans multiple years, the holding-period return can also be annualized.
If the horizon is T years:
where:
= holding-period return in currency terms
= purchase price
= sale price
= holding-period return as a decimal
= holding period in years
Worked Return Decomposition
A bond is purchased for USD 1,000, pays USD 50 in coupons, earns USD 2 on reinvested coupons, and is sold for USD 1,020.
Component | USD |
|---|---|
Coupon income | 50 |
Reinvestment income | 2 |
Price change | 20 |
Total return | 72 |
Working Example
Ending wealth is USD 1,072: USD 50 of coupons, USD 2 of reinvestment income, and USD 1,020 of sale proceeds. Compared with the USD 1,000 purchase price, wealth increased by USD 72. The decomposition shows why coupon yield alone is not total return.
Common Exam Traps
Counting coupon income but omitting reinvestment income
Total realized return over a holding period can include coupons, earnings on reinvested coupons, and the gain or loss between sale and purchase prices.
Using the sale price as the holding-period return denominator
Measure the investor's gain relative to the initial purchase price, then include interim cash received and reinvestment income when the question supplies them.
Calling a capital gain the full return
A bond sold above its purchase price may also have paid coupons; ignoring those cash flows understates the investor's holding-period return.
Assuming realized return must equal the YTM at purchase
That equality depends on assumptions such as holding to maturity and reinvesting coupons at the assumed rate. Earlier sale or different reinvestment rates changes the result.
Double-counting reinvested coupons
Add the coupon cash once and include only the extra earnings from reinvesting it; do not add the accumulated value and the same original coupon again.
Practice Question
A bond is bought for USD 1,000, pays USD 50 in coupons, earns USD 2 on reinvested coupons, and is sold for USD 1,020. Its holding-period return is:
5.0%
7.0%
7.2%
Correct Answer: Option C
The holding-period return is .
Option A: The 5.0% result counts only coupon income and omits reinvestment income and the price gain.
Option B: The 7.0% result omits the USD 2 of reinvestment income.
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FAQs About Sources of Return From Investing in a Fixed-Rate Bond
What are the three sources of bond return?
Coupon income, reinvestment income, and price change.
How do you calculate bond holding-period return?
Add coupon income, reinvestment income, and price change, then divide by purchase price.
Why can realized bond return differ from YTM?
Actual reinvestment rates, holding period, and sale yield can differ from YTM assumptions.