A 40-year maturity bond has a 6% coupon rate, paid annually. It sells today for $1,017.42. A
Question:
A 40-year maturity bond has a 6% coupon rate, paid annually. It sells today for $1,017.42. A 30-year maturity bond has a 6.5% coupon rate, also paid annually. It sells today for $1,009.5. A bond market analyst forecasts that in five years, 35-year maturity bonds will sell at yields to maturity of 8% and that 25-year maturity bonds will sell at yields of 7.5%. Because the yield curve is upward-sloping, the analyst believes that coupons will be invested in short-term securities at a rate of 6%.
a. Calculate the annual return for the 40-year maturity bond over the next five years. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Expected rate of return %
b. What is the expected return of the 30-year bond. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Expected rate of return %