A 30-year maturity bond has a 8.7% coupon rate, paid annually. It sells today fo

Question

A 30-year maturity bond has a 8.7% coupon rate, paid annually. It sells today for $877.42. A 20-year maturity bond has 8.2% coupon rate, also paid annually. It sells today for $878.1. A bond market analyst forecasts that in 5 years, 25-year maturity bonds will sell at yields to maturity of 9.7% and 15-year maturity bonds will sell at yields of 9.2%. Because the yield curve is upward sloping, the analyst believes that coupons will be invested in short-term securities at a rate of 6.2%. What rate of return does each bond offer over the 5-year period? (Round your answers to 2 decimal places. Omit the "%" sign in your response.)

A 30-year maturity bond has a 8.7% coupon rate, paid annually. It sells today for $877.42. A 20-year maturity bond has 8.2% coupon rate, also paid annually. It sells today for $878.1. A bond market analyst forecasts that in 5 years, 25-year maturity bonds will sell at yields to maturity of 9.7% and 15-year maturity bonds will sell at yields of 9.2%. Because the yield curve is upward sloping, the analyst believes that coupons will be invested in short-term securities at a rate of 6.2%. What rate of return does each bond offer over the 5-year period? (Round your answers to 2 decimal places. Omit the "%" sign in your response.)

Explanation / Answer

Answer Coupon received on 30 year bond = $877.42 *8.7% = 76.33554

Now suppose these 76.33554 is invested at the rate of 6.2% for 5 years

Amount received after 5 years = 76.33554 ( 1+6.2%) ^5

= 103.1215

Rate of return 30 year bond offer over 5 years = 103.1215/ $877.42 *100 =11.75%

Coupon received on 20 year bond = $878.1 *8.2% = 72.0042

Now suppose these 72.0042 is invested at the rate of 6.2% for 5 years

Amount received after 5 years = 72.0042 ( 1+6.2%) ^5

= 97.2703

Rate of return 20 year bond offer over 5 years = 97.2703/ $878.1 *100 =11.08%

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.