3. Bond Value and Time; Constant Required Returns

LPI has just issued an 18-year, 8.5% coupon, $1000-par-value bond that pays interest annually. The required rate of return is currently 10%, and the company expects the required rate of return to remain at 10% until the bond matures in 18 years.

1. Assuming the required rate of return remains at 10% until maturity, find the value of the bond each year (years 18 to year 1) until maturity.
2. Plot the value of the bond over time, with Time to Maturity on the x-axis and Market Value of Bond on the y-axis.
3. All else remaining the same, when the required return differs from the coupon rate and is assumed to be constant until maturity, what happens to the bond value as time moves toward maturity? Explain your answer considering the graph in part b.