Question
A 15 year maturity bond has a 4.5% coupon rate, paid annually. It sells today for $905.00. A bond market analyst forecast that in four
A 15 year maturity bond has a 4.5% coupon rate, paid annually. It sells today for $905.00. A bond market analyst forecast that in four years, 21-year maturity bonds will sell at yield to maturity of 5.25% and that 11-year maturity bonds will sell at yields of 5%. Because the yield curve is upward sloping, the analyst believes that coupons can be invested in short term securities at a rate of 3.5%.
a. Calculate the expected rate of return of the 25-year bond over the four year period
b. What is the expected return of the 15-year bond over the same holding period?
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