What are the components of expected bond returns?

Expected bond returns are determined by several key components that reflect the income generated from the bond as well as changes in its value over time. The correct answer emphasizes that expected returns include yield income, rolldown return, and expected price changes.

Yield income refers to the interest payments received from holding the bond. This is a fundamental reason investors purchase bonds, as it provides a steady income stream over their investment horizon.

Rolldown return captures the change in price as the bond approaches maturity. Generally, as bonds near their maturity dates, their prices increase if the yield curve is upward-sloping. Investors benefit from this "rolldown" effect, as they may realize gains when the bond's price appreciates.

Expected price changes based on forecasts account for market movements and changes in interest rates that impact bond prices. Factors like anticipated changes in inflation, monetary policy from central banks, and shifts in credit risk also influence expected price changes.

Together, these components—yield income, rolldown return, and expected price changes—provide a comprehensive view of what investors can expect from bond investments. This holistic approach is critical for accurately assessing the total expected return on fixed income securities.