A 40-year maturity bond has a 7% coupon rate, paid annually. It sells today for $997.42. 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-1.	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.)

Annual rate of return

%

a-2.	Calculate the annual return for the 30-year maturity bond over the next five years. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Annual rate of return

%

b.

Which bond offers the higher expected rate of return over the five-year period?

	30-year maturity bond or
	40-year maturity bond