Question

Can you show your work or calculator steps?

A 40-year maturity bond has a 7% coupon rate, paid annually. It sells today for $90742. A 30-year maturity bond has a 6.5% coupon rate, also paid annually. It sells today for $919.5. A bond market analyst forecasts that in five years, 35-year maturity bonds will sell at yields to maturity of 8% and that 25-year maturity bonds will sell at yields of 7.5%. Because the yield curve is upward-sloping, the analyst believes that coupons will be invested in short-term securities at a rate of 6%. a. Calculate the expected rate of return of the 40-year bond over the five-year period. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Expected rate of return b. What is the expected return of the 30-year bond? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Expected role of return %

Answer 1

1.
Step 1: Future value of coupons using financial calculator
N=5
PMT=-7%*1000
I/Y=6%
PV=0
CPT FV=394.60

Step 2: Selling price
N=35
I/Y=8%
PMT=-7%*1000
FV=-1000
CPT PV=883.45

Step 3: Return
N=5
PV=-907.42
PMT=0
FV=394.60+883.45
CPT I/Y=7.090%

2.
Step 1: Future value of coupons using financial calculator
N=5
PMT=-6.5%*1000
I/Y=6%
PV=0
CPT FV=366.41

Step 2: Selling price
N=25
I/Y=7.5%
PMT=-6.5%*1000
FV=-1000
CPT PV=888.53

Step 3: Return
N=5
PV=-919.5
PMT=0
FV=366.41+888.53
CPT I/Y=6.418%