A 30-year maturity bond has a 7% coupon rate, paid annually. It sells today for $867.42.

A 20-year maturity bond has a 6.5% coupon rate, also paid annually. It sells today for

$879.50. A bond market analyst forecasts that in five years, 25-year maturity bonds will sell at yields to maturity of 8% and that 15-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%. Which bond offers the higher expected rate of return over the five-year period?

Challenge LO.1