A 25-year maturity bond has a 9% coupon rate, paid annually. It sells today for $927.42. A 15-year maturity bond has a 8.5% coupon rate, also paid annually. It sells today for $939.5. A bond market analyst forecasts that in five years, 20-year maturity bonds will sell at yields to maturity of 10% and that 10-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 25-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 15-year bond. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Expected rate of return %