Problem 16-20

A 30-year maturity bond has a 5.1% coupon rate, paid annually. It sells today for $878.67. A 20-year maturity bond has a 4.6% coupon rate, also paid annually. It sells today for $883.1. A bond market analyst forecasts that in five years, 25-year maturity bonds will sell at yields to maturity of 6.1% and 15-year maturity bonds will sell at yields of 5.6%. Because the yield curve is upward sloping, the analyst believes that coupons will be invested in short-term securities at a rate of 5.2%.

a. Calculate the (annualized) expected rate of return of the 30-year bond over the 5-year period. (Round your answer to 2 decimal places.)

b. What is the (annualized) expected return of the 20-year bond? (Round your answer to 2 decimal places.)