A 30-year-maturity bond has a 6.5% coupon rate, paid annually. It sells today for $874.92. A 20-year-maturity bond has a 6.0% coupon rate, also paid annually. It sells today for $891.9. A bond market analyst forecasts that in five years, 25-year-maturity bonds will sell at yields to maturity of 7.5% and 15-year-maturity bonds will sell at yields of 7.0%. Because the yield curve is upward-sloping, the analyst believes that coupons will be invested in short-term securities at a rate of 4.1%. Required: a. Calculate the (annualized) expected rate of return of the 30-year bond over the 5-year period. Note: Do not round your intermediate calculations. Round your answer to 2 decimal places. b. What is the (annualized) expected return of the 20-year bond? Note: Do not round your intermediate calculations. Round your answer to 2 decimal places. a. 30-year bond b. 20-year bond % %

A 30-year-maturity bond has a 6.5% coupon rate, paid annually. It sells today for $874.92. A 20-year-maturity bond has a 6.0% coupon rate, also paid annually. It sells today for $891.9. A bond market analyst forecasts that in five years, 25-year-maturity bonds will sell at yields to maturity of 7.5% and 15-year-maturity bonds will sell at yields of 7.0%. Because the yield curve is upward-sloping, the analyst believes that coupons will be invested in short-term securities at a rate of 4.1%. Required: a. Calculate the (annualized) expected rate of return of the 30-year bond over the 5-year period. Note: Do not round your intermediate calculations. Round your answer to 2 decimal places. b. What is the (annualized) expected return of the 20-year bond? Note: Do not round your intermediate calculations. Round your answer to 2 decimal places. a. 30-year bond b. 20-year bond % %

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter6: Fixed-income Securities: Characteristics And Valuation

Section: Chapter Questions

Problem 4P

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