Question: A 3 0 - year maturity bond has a 9 % coupon rate, paid annually. It sells today for $ 8 9 7 . 4

A 30-year maturity bond has a 9% coupon rate, paid annually. It sells today for $897.42. A 20-year maturity bond has a 8.5% coupon rate, also paid annually. It sells today for $909.5. A bond market analyst forecasts that in five years, 25-year maturity bonds will sell at yields to maturity of 10% and that 15-year maturity bonds will sell at yields of 9.5%. Because the yield curve is upward-sloping, the analyst believes that coupons will be invested in short-term securities at a rate of 8%.
Required:
a. Calculate the expected rate of return of the 30-year bond over the five-year period. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
b. What is the expected return of the 20-year bond over the five-year period? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer
Step: 1 Unlock blur-text-image
Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock
Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!