Suppose that the current spot rate curve (annually compounded) is s1=0.2%, s2=0.8%, s3=1.2%.
Assume that one year from now, the spot rate curve will be s'1=0.8%, s'2=1.4%, s'3=1.8%.
Consider a 3-year bond with annual coupon 5%. If you purchase that bond today and hold it for one year, what will be your total return (i.e. consider both price change and coupon)? (nearest 0.01%, and e.g. write 5.02 for 5.02%).
Answer should be: 0.77
What I have tried: step 1: find the current price of a three year bond: 111.2199
Find the sell price: 105/1.008= 104.16
But why the sell price is less than a buy price? and I m ending up with negative return. How to get to 0.77?