Bondco's bond trades down to £95
How does this impact my return?
Let's suppose you bought the bond to hold to maturity. Your view is that Bondco is a good business, there is a low risk of it defaulting. It's never defaulted before and other similar bonds have traded down too.
The fall in the price has no impact on the income you will earn if you intend to hold the bond to maturity. You will still receive 5% interest each year and you'll expect to receive £100 back at maturity.
Your expected return is 5% whatever happens to the price of the bond in the secondary market, if you hold the bond to maturity.
On reflection you think the price could go lower because the economy is getting worse.
You sell the bond for £95 on the first interest payment date. You receive £5 interest and £95 for the bond that has a face value of £100.
You've received income of £5 but you've made a capital loss of £5. By selling the bond at a loss, your return has been impacted.
It's only when you sell your bond (or buy some more) that the expected hold-to-maturity yield changes.
TOTAL RETURN
A total return looks at the income you received and the gain or loss in the price.
Total return = (Price sold - Price bought) + income / Price bought
Total return = (95-100) + 5 / 100
Total return = zero