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A 25-year maturity bond has a 8% coupon rate, paid annually. It sells today for $887.42. A 15-year maturity bond has a 7.5% coupon rate, also paid annually. It sells today for $899.5. A bond market analyst forecasts that in five years, 20-year maturity bonds will sell at yields to maturity of 9% and that 10-year maturity bonds will sell at yields of 8.5%. Because the yield curve is upward-sloping, the analyst believes that coupons will be invested in short-term securities at a rate of 7%. Required: a. Calculate the expected rate of return of the 25-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 15-year bond over the five-year period? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Expected rate of return

A 25-year maturity bond has a 8% coupon rate, paid annually. It sells today for $887.42. A 15-year maturity bond has a 7.5% coupon rate, also paid annually. It sells today for $899.5. A bond market analyst forecasts that in five years, 20-year maturity bonds will sell at yields to maturity of 9% and that 10-year maturity bonds will sell at yields of 8.5%. Because the yield curve is upward-sloping, the analyst believes that coupons will be invested in short-term securities at a rate of 7%. Required: a. Calculate the expected rate of return of the 25-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 15-year bond over the five-year period? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Expected rate of return

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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s A 25-year maturity bond has a 8 % coupon rate, paid annually. It sells today for $887.42. A 15-year maturity bond has a 7.5% coupon rate, also paid annually. It sells today for $899.5. A bond market analyst forecasts that in five years, 20-year maturity bonds will sell at yields to maturity of 9% and that 10-year maturity bonds will sell at yields of 8.5%. Because the yield curve is upward-sloping, the analyst believes that coupons will be invested in short-term securities at a rate of 7%. Required: a. Calculate the expected rate of return of the 25-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 15-year bond over the five-year period? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Expected rate of return %
Transcribed Image Text:s A 25-year maturity bond has a 8 % coupon rate, paid annually. It sells today for $887.42. A 15-year maturity bond has a 7.5% coupon rate, also paid annually. It sells today for $899.5. A bond market analyst forecasts that in five years, 20-year maturity bonds will sell at yields to maturity of 9% and that 10-year maturity bonds will sell at yields of 8.5%. Because the yield curve is upward-sloping, the analyst believes that coupons will be invested in short-term securities at a rate of 7%. Required: a. Calculate the expected rate of return of the 25-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 15-year bond over the five-year period? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Expected rate of return %
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