A 40-year maturity bond has a 8% coupon rate, paid annually. It sells today for $957.42. A 30-year maturity bond has a 7.5% coupon rate, also paid annually. It sells today for $969.5. A bond market analyst forecasts that in five years, 35-year maturity bonds will sell at yields to maturity of 9% and that 25-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 40-year bond over the five-year period. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Expected rate of return %
A 40-year maturity bond has a 8% coupon rate, paid annually. It sells today for $957.42. A 30-year maturity bond has a 7.5% coupon rate, also paid annually. It sells today for $969.5. A bond market analyst forecasts that in five years, 35-year maturity bonds will sell at yields to maturity of 9% and that 25-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 40-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
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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Transcribed Image Text:A 40-year maturity bond has a 8% coupon rate, paid annually. It sells today for $957.42. A 30-year maturity bond has a 7.5% coupon
rate, also paid annually. It sells today for $969.5. A bond market analyst forecasts that in five years, 35-year maturity bonds will sell at
yields to maturity of 9% and that 25-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 40-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 30-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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