What factors are typically involved in determining expected returns in fixed-income investments?

In fixed-income investments, expected returns are primarily determined by cash flows associated with the investment, which include coupon payments and the principal amount (the par value). The coupon payments represent the interest income generated over the life of the bond, which is typically paid semi-annually. The principal amount is significant as it is the return of the original investment at maturity. These two components are foundational in calculating the total return an investor can expect, as they secure both periodic income and a return of the initial investment.

While bond yield and maturity certainly play important roles in understanding the pricing and valuation of bonds, they do not directly constitute the expected return in the same way that the cash flows do. Historical performance and inflation rates can provide context and influence expectations but are not direct components of expected returns. Market trends and comparative indices may indicate the performance of fixed-income markets but do not provide a direct calculation of expected returns. Therefore, the most accurate elements in determining expected returns are indeed the coupon payments and the principal amount.