Question: A 20-year maturity bond has a 9% coupon rate, paid annually. It sells today for $947.42. A 10-year maturity bond has a 8.5% coupon rate, also paid annually. It sells today for $959.5. A bond market analyst forecasts that in five years, 15-year maturity bonds will sell at yields to maturity of 10% and that 5-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. Calculate the annual return for the 20-year maturity bond over the next five years. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Expected rate of return %
b. What is the expected return of the 10-year bond. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Expected rate of return %