Question

A 30-year maturity bond has a 7.6% coupon rate, paid annually. It sells today for $886.17. A 20-year maturity bond has a 7.1% coupon rate, also paid annually. It sells today for $895.5. A bond market analyst forecasts that in five years, 25-year maturity bonds will sell at yields to maturity of 8.6% and 15-year maturity bonds will sell at yields of 8.1%. Because the yield curve is upward sloping, the analyst believes that coupons will be invested in short-term securities at a rate of 7.3%. 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.) b. What is the (annualized) expected return of the 20-year bond? (Round your answer to 2 decimal places.)

Answer 1

1.
=((7.6%*1000/7.3%*(1.073^5-1)+(1000*7.6%/8.6%*(1-1/1.086^25)+1000/1.086^25))/(886.17))^(1/5)-1
=8.59248%

2.
=((7.1%*1000/7.3%*(1.073^5-1)+(1000*7.1%/8.1%*(1-1/1.081^15)+1000/1.081^15))/(895.5))^(1/5)-1
=8.16196%