A 35-year maturity bond has a 6% coupon rate, paid annually. It sells today for $937.42....

A 35-year maturity bond has a 6% coupon rate, paid annually. It sells today for $937.42. A 25-year maturity bond has a 5.5% coupon rate, also paid annually. It sells today for $949.5. A bond market analyst forecasts that in five years, 30-year maturity bonds will sell at yields to maturity of 7% and that 20-year maturity bonds will sell at yields of 6.5%. Because the yield curve is upward-sloping, the analyst believes that coupons will be invested in short-term securities at a rate of 5%.

a. Calculate the expected rate of return of the 35-year bond over the five-year period. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b. What is the expected return of the 25-year bond? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Expert Solution

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Cell reference -

jeff jeffy answered 6 months ago

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