Lynn Parsons is considering investing in either of two outstanding bonds. The bonds both have $1,000 par values and 8% coupon interest rates and pay annual interest. Bond A has exactly 8 years to maturity, and bond B has 18 years to maturity.

a. Calculate the present value of bond A if the required return is (1) 5%, (2) 8%, and (3) 11%.

b. Calculate the present value of bond B if the required return is (1) 5%, (2) 8%, and (3) 11%.

c. From your findings in parts a and b, discuss the relationship between time to maturity and changing required returns.

d. If Lynn wanted to minimize interest rate risk, which bond should she purchase? Why?

Answer rating: 100% (QA)

Calculate the present value as follows A B C The higher maturity period will have a higher pr... View the full answer