Assume a flat yield curve of 6%. A 3-year of $100 bond is issued at par with a coupon rate as 6%. What is the expected return if the yield curve one year from today will be flat at 7%
The ans of the question is 4.19%, but i dont understand how they got it
Solution ={ 6 + (6/1.07) + 106/(1.07)^2 }/100- 1
why are they adding 6. I understand that it is a pmt we already received but why include it?
Yes, you did receive the $6 coupon at time 1 and it is now in your pocket. 
The reason why the coupon payment of 6 is included in the calculation is because it represents the income that the investor will receive in the first year. Since the yield curve is expected to remain flat at 7% one year from today, the price of the bond will be affected by the change in yield.
To calculate the expected return of the bond, we need to take into account the coupon payments as well as the capital gain or loss that will result from the change in yield. In this case, since the yield curve is expected to increase from 6% to 7%, the bond price will decrease, resulting in a capital loss.
The formula you provided takes into account the present value of the expected cash flows (the coupon payment of 6 in year 1, the coupon payment of 6 in year 2, and the principal payment of 106 in year 3) and compares it to the price of the bond at par (100). By solving for the expected return using this formula, we can determine the yield that will make the present value of the cash flows equal to the price of the bond.
So, the coupon payment of 6 is included in the calculation because it represents the income that the investor will receive in the first year, and it affects the expected return of the bond.
got it! Thank you!