Bond value and

timelong dashConstant

required returns Pecos Manufacturing has just issued a

15 -year,

9 %

coupon interest rate,

$1,000 -par

bond that pays interest annually. The required return is currently

16 %,

and the company is certain it will remain at

16 %

until the bond matures in

15

years.

a. Assuming that the required return does remain at

16 %

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:

LOADING.

a. (1) The value of the bond with

15

years to maturity is

$nothing.

(Round to the nearest cent.)

(2) The value of the bond with 12 years to maturity is

$nothing.

(Round to the nearest cent.)

(3) The value of the bond with 9 years to maturity is

$nothing.

(Round to the nearest cent.)

(4) The value of the bond with 6 years to maturity is

$nothing.

(Round to the nearest cent.)

(5) The value of the bond with 3 years to maturity is

$nothing.

(Round to the nearest cent.)

(6) The value of the bond with 1 year to maturity is

$nothing.

(Round to the nearest cent.)

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? (Select the best answer below.)

A.

The bond value approaches infinity.

B.

The bond value approaches the par value.

C.

The bond value approaches zero.

D.

The bond value approaches the amount of the last interest payment.

110 Years to Matunty