Bond value and changing required returns Midland Utilities has a bond issue outstanding that will mature to its $1,000 par value in 15 years. The bond has a coupon interest rate of 11% and pays interest annually. a. Find the value of the bond if the required return is (1) 11%, (2) 15%, and (3) 8%. b. Use your finding in part a and the graph here, w, to discuss the relationship between the coupon interest rate on a bond and the required return and the market value of the bond relative to its par value. c. What two possible reasons could cause the required return to differ from the coupon interest rate? a. (1) The value of the bond, if the required return is 11%, is $. (Round to the nearest cent.) Graph/chart Bond Value ($) 1,500 1,400- 1,300 1,200- 1,100- 1,000- 900- 800- 700- 600- 500- 8 9 15 10 11 12 13 14 Required return (%) Print Done Bond value and time Constant required returns Pecos Manufacturing has just issued a 15-year, 11% coupon interest rate, $1,000-par bond that pays interest annually. The required return is currently 15%, and the company is certain it will remain at 15% until the bond matures in 15 years. a. Assuming that the required return does remain at 15% until maturity, find the value of the bond with (1) 15 years, (2) 12 years, (3) 9 years, (4) 6 years, (5) 3 years, (6) 1 year to maturity. b. All else remaining the same, when the required return differs from the coupon interest rate and is assumed to be constant to maturity, what happens to the bond value as time moves toward maturity? Explain in light of the following graph: w .. a. (1) The value of the bond with 15 years to maturity is $. (Round to the nearest cent.) - Graph/chart 1,300- 1,200- 1,100 1,000+ Bond Value ($) 900 8004 700- 600- 500+ 15 Years to Maturity Print Done