Bond value and

timelong dashChanging

required returnsPersonal Finance Problem Lynn Parsons is considering investing in either of two outstanding bonds. The bonds both have

$1 comma 0001,000

par values and

99%

coupon interest rates and pay annual interest. Bond A has exactly

88

years to maturity, and bond B has

1818

years to maturity.a.Calculate the present value of bond A if the required rate of return is: (1)

66%,

(2)

99%,

and (3)

1212%.

b.Calculate the present value of bond B if the required rate of return is: (1)

66%,

(2)

99%,

and (3)

1212%.

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?

a. (1) The value of bond A, if the required return is

66%,

is

$nothing.

(Round to the nearest cent.)(2) The value of bond A, if the required return is

99%,

is

$nothing.

(Round to the nearest cent.)(3) The value of bond A, if the required return is

1212%

is

$nothing.

(Round to the nearest cent.)b.(1) The value of bond B, if the required return is

66%,

is

$nothing.

(Round to the nearest cent.)(2) The value of bond B, if the required return is

99%,

is

$nothing.

(Round to the nearest cent.)(3) The value of bond B, if the required return is

1212%,

is

$nothing.

(Round to the nearest cent.)c. From your findings in parts a and

b,

discuss the relationship between time to maturity and changing required returns.The greater the length of time to maturity, the

more

less

responsive the market value of the bond is to changing required returns, and vice versa.(Select from the drop-down menus.)

d.If Lynn wanted to minimize interest rate risk, which bond should she purchase? Why? (Select the best answer below.)

She should purchase bond A because its price is more responsive to changes in interest rates.

She should purchase bond A because its price is less responsive to changes in interest rates.

She should purchase bond B because its price is more responsive to changes in interest rates.

She should purchase bond B because its price is less responsive to changes in interest rates.