Two investors are each issued one bond with the same face value, maturity date, and yield. After both bonds have reached maturity, it is discovered that one of the bondholders received a greater total return on her investment. If all expected payments were received, which of the following could explain the difference in return?
The bond with the higher return may have had a lower purchase price than the other bond. This would result in a higher percentage return, even if the face value, maturity date, and yield were all the same.
The difference in return could be explained by the following factors:
1. Coupon rate: The bondholder who received a higher coupon rate would have received higher periodic payments throughout the bond's life, resulting in a greater total return on their investment.
2. Reinvestment rate: If one bondholder reinvested the periodic payments at a higher interest rate than the other, they would earn more returns on their reinvestments, leading to a higher total return.
3. Call provision: If one bond had a call provision, allowing the issuer to redeem it before maturity, the bondholder may have received a lower return if the bond was called early.
4. Default risk: If one bondholder's bond had a higher risk of default than the other, they may have demanded a higher yield to compensate for the risk. In this case, if the bond did not default, the higher yield would result in a higher total return.
It is important to note that without specific details or further clarification, it is difficult to determine the exact reason for the difference in return.