Calculate the expected annualized compound rate of return

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Reference no: EM131883640

1. A bond fund manager has a five year time horizon, and is considering two bonds. The first is a 15-year to maturity bond with a 3.25% coupon rate, paid annually. The price of this bond today is 100% of face value. The second bond is a 20-year to maturity bond with a 3.75% coupon rate, paid annually. The price of this bond is 101.5% of face value.

a. Calculate the yield to maturity for each bond.

b. The bond fund manager forecasts that, in five years, the 15-year bond will sell at a yield to maturity of 3.50% and the 20-year bond will sell at a yield to maturity of 4.1%. The bond fund manager also expects that the coupons can be reinvested at an annual rate of 3% over the period.

Calculate the expected annualized compound rate of return over the five years for each bond. Which bond offers the higher expected compound rate of return?

Reference no: EM131883640

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