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A bond fund manager has a four year time horizon, and is considering two bonds. The first is a 15-year to maturity bond with a 6.60% 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 issued 7% coupon rate, paid annually. The price of this bond is 101.05% of face value.

a. Calculate the yield to maturity for each bond.

b. The bond fund manager forecasts that, in four years, the 15-year bond will sell at a yield to maturity of 6.45% and the 20-year bond will sell at a yield to maturity of 6.70%. The bond fund manager also expects that the coupons can be reinvested at an annual rate of 4.75% 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?

 

Business Economics, Economics

  • Category:- Business Economics
  • Reference No.:- M9444498

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