Question
A 30-year maturity bond has a 7% coupon rate, paid annually. It sells today for $1,047.42. A 20-year maturity bond has a 6.5% coupon rate,
A 30-year maturity bond has a 7% coupon rate, paid annually. It sells today for $1,047.42. A 20-year maturity bond has a 6.5% coupon rate, also paid annually. It sells today for $1,059.5. 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%. 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? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
A 30-year maturity bond has a 7% coupon rate, paid annually. It sells today for $1,047.42. A 20-year maturity bond has a 6.5% coupon rate, also paid annually. It sells today for $1,059.5. 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% 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.) Expected rate of return b. What is the expected return of the 20-year bond? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Expected rate of returnStep by Step Solution
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