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 %

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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