Which bond offers higher expected compound rate of return

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Reference no: EM13942016

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 5.75% 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 7% coupon rate, paid annually. The price of this bond is 102% of face value.

The bond fund manager forecasts that, in five years, the 15-year bond (which will have 10 years remaining until maturity) will sell at a yield to maturity of 5.45% and the 20-year bond (which will have 15 years remaining until maturity) will sell at a yield to maturity of 6.50%. The bond fund manager also expects that the coupons can be reinvested at an annual rate of 5% 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: EM13942016

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