A 30-year maturity bond has a 7.4% coupon rate, paid annually. It sells today for $879.92. A 20-year maturity bond has a 6.9% coupon rate, also paid annually. It sells today for $888.1. A bond market analyst forecasts that in five years, 25-year maturity bonds will sell at yields to maturity of 8.4 % and 15-year maturity bonds will sell at yields of 7.9%. Because the yield curve is upward sloping, the analyst believes that coupons will be invested in short-term securities at a rate of 4.2%. a. Calculate the (annualized) expected rate of return of the 30-year bond over the 5-year period. (Round your answer to 2 decimal places.) 30-year bond b. What is the (annualized) expected return of the 20-year bond? (Round your answer to 2 decimal places.) 20-year bond
A 30-year maturity bond has a 7.4% coupon rate, paid annually. It sells today for $879.92. A 20-year maturity bond has a 6.9% coupon rate, also paid annually. It sells today for $888.1. A bond market analyst forecasts that in five years, 25-year maturity bonds will sell at yields to maturity of 8.4 % and 15-year maturity bonds will sell at yields of 7.9%. Because the yield curve is upward sloping, the analyst believes that coupons will be invested in short-term securities at a rate of 4.2%. a. Calculate the (annualized) expected rate of return of the 30-year bond over the 5-year period. (Round your answer to 2 decimal places.) 30-year bond b. What is the (annualized) expected return of the 20-year bond? (Round your answer to 2 decimal places.) 20-year bond
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
Problem 1PS
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A 251.
Transcribed Image Text:A 30-year maturity bond has a 7.4% coupon rate, paid annually. It sells today for $879.92. A 20-year maturity bond has a 6.9% coupon
rate, also paid annually. It sells today for $888.1. A bond market analyst forecasts that in five years, 25-year maturity bonds will sell at
yields to maturity of 8.4% and 15-year maturity bonds will sell at yields of 7.9%. Because the yield curve is upward sloping, the analyst
believes that coupons will be invested in short-term securities at a rate of 4.2%.
a. Calculate the (annualized) expected rate of return of the 30-year bond over the 5-year period. (Round your answer to 2 decimal
places.)
30-year bond
%
b. What is the (annualized) expected return of the 20-year bond? (Round your answer to 2 decimal places.)
20-year bond
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