Financial Investment

A 25-year maturity bond has a 9% coupon rate, paid annually. It sells today for $1,027.42. A 15-year maturity bond has a 8.5% coupon rate, also paid annually. It sells today for $1,039.5. A bond market analyst forecasts that in five years, 20-year maturity bonds will sell at yields to maturity of 10% and that 10-year maturity bonds will sell at yields of 9.5%. Because the yield curve is upward-sloping, the analyst believes that coupons will be invested in short-term securities at a rate of 8%.

 

a-1. Calculate the annual return for the 25-year maturity bond over the next five years. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 

Don't use plagiarized sources. Get Your Custom Essay on
Need an answer from similar question? You have just landed to the most confidential, trustful essay writing service to order the paper from.
Just from $11/Page
Order Now
  Annual rate of return [removed] %

 

a-2. Calculate the annual return for the 15-year maturity bond over the next five years. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 

  Annual rate of return [removed] %

 

b. Which bond offers the higher expected rate of return over the five-year period?
[removed] 25-year maturity bond
[removed] 15-year maturity bond