In: Finance
30-year maturity bond has a 5.3% coupon rate, paid annually. It sells today for $884.92. A 20-year maturity bond has a 4.8% coupon rate, also paid annually. It sells today for $890.5. A bond market analyst forecasts that in five years, 25-year maturity bonds will sell at yields to maturity of 6.3% and 15-year maturity bonds will sell at yields of 5.8%. Because the yield curve is upward sloping, the analyst believes that coupons will be invested in short-term securities at a rate of 4.3%.
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.)
Given,
Today's 30-year bond price = $ 884.92
Today's 20-year bond price = $ 890.50
Solution :-