: Bond value and timeConstant required returns

Pecos Manufacturing has just issued a 20-year, 14% 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 20 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, and

(6) 1 year to maturity.

b.Plot your findings on a set of "time to maturity (x axis)-market value of bond (y axis)" axes constructed similarly to Figure 6.6.

c.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 graph in part b.