P-17&18

Bond value and changing required returns Midland Utilities has outstanding a bond issue that will mature to its $1, 000 par value in 12 years. The bond has a coupon interest rate of 11% and pays interest annually. Find the value of the bond if the required return is (1) 11%, (2) 15%, and (3) 8%. Plot your findings in part a on a set of "required return (x axis)-market value of bond (y axis)" axes. Use your findings in parts a and b to discuss the relationship between the coupon interest rate on a bond and the required return and the market value of the bond relative to its par value. What two possible reasons could cause the required return to differ from the coupon interest rate? Bond value and time: Constant required returns Pecos Manufacturing has just issued a 15-year, 12% coupon interest rate. Si, 000-par bond that pays interest annually. The required return is currently 14%, and the company is certain it will remain at 14% until the bond matures in 15 years. Assuming that the required return docs remain at 14% 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. Plot your findings on a set of "time to maturity (x axis-market value of bond (y axis)" axes constructed similarly to Figure 6.5 on page 252. 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