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A 30-year maturity bond has a 6% coupon rate, paid annually. It sells today for $877.42. A 20-year maturity bond has a 5.5% coupon rate, also paid annually. It sells today for $889.5. A bond market analyst forecasts that in five years, 25-year maturity bonds will sell at yields to maturity of 7% and that 15-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 annual return for the 30-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 20-year bond. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
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