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A 25-year maturity bond has a 9% coupon rate, paid annually. It sells today for $925.40. A 15-year bond has an 8% coupon rate, also paid annually and sells today for $872.60. A bond market analyst forecasts that in five years, bonds with 20 years to maturity will sell at yields of 10% while 10-year maturity bonds will sell at prices to yield 9%. The analyst also believes that coupons will be invested in short-term securities that will earn 6.5% per year. Which bond offers a higher expected rate of return? Compute both a return over the five years as well as an annualized return. You must show all your calculations.Who knows?please...

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SkiChallenger

25 year bonds
Price in 5 years = PV(r=10%, FV=1000, PMT=90, n=20)= 914.86
Money got from revesting coupons = FV(r=6.5%, PMT=90, n = 5, pv=0) = 512.43
(1+r)(power 5) = (914.86 + 512.43)/925.4 = 1.5424
r = 9.05%

15 year bond
Price in 5 years = PV(r=9%, FV=1000, PMT=80, n=10)= 935.82
Money got from revesting coupons = FV(r=6.5%, PMT=80, n = 5, pv=0) = 455.49
(1+r)(power 5) = (914.86 + 374.01)/872.6 = 1.5944
r = 9.78%

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