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Investing in Bonds

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The price of an annual paid 7% coupon bond with a 30-year maturity = $867.42
The price of an annual paid 6.5% coupon bond with a 20-year maturity = $879.50

It is forecasted that in 5 years, 25-year maturity bonds will sell at yields to maturity of 8% and 15-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%.

Which bond offers the highest expected rate of return over the five-year period?

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Solution Summary

The solution calculates the highest expected rate of return over the five-year period for two bonds

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