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.) |
| 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? | ||||
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