LPI has just issued an 15-year, 10% coupon, $1000-par-value bond that pays interest annually. The required rate of return is currently 12%, and the company expects the required rate of return to remain at 12% until the bond matures in 15 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.

Answer rating: 100% (QA)

YTM of bond is ca... View the full answer