Bond value and changing required returns Midland Utilities has a bond issue outstanding that will mature to its $1,000 par value in 15 years. The bond has a coupon interest rate of 13% and pays interest annually. a. Find the bond value if the required return is (1) 13%, (2) 17%, and (3) 10%. b. Use your finding in part a and the graph here, , to discuss the relationship between the coupon rate, the required return and the market value of the bond relative to its par value. c. What two possible reasons could cause the required return to differ from the coupon interest rate?
Bond value and changing required returns Midland Utilities has a bond issue outstanding that will mature to its $1,000 par value in 15 years. The bond has a coupon interest rate of 13% and pays interest annually. a. Find the bond value if the required return is (1) 13%, (2) 17%, and (3) 10%. b. Use your finding in part a and the graph here, , to discuss the relationship between the coupon rate, the required return and the market value of the bond relative to its par value. c. What two possible reasons could cause the required return to differ from the coupon interest rate?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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![Bond value and changing required returns Midland Utilities has a bond issue outstanding that will mature to its $1,000 par value in 15 years. The bond has a coupon interest rate of 13% and
pays interest annually.
a. Find the bond value if the required return is (1) 13%, (2) 17%, and (3) 10%.
b. Use your finding in part a and the graph here,
to discuss the relationship between the coupon rate, the required return and the market value of the bond relative to its par value.
c. What two possible reasons could cause the required return to differ from the coupon interest rate?
a. (1) The value of the bond, if the required return is 13%, is $
(Round to the nearest cent.)](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fab95af0c-8761-45ad-a409-00b969071184%2F97080eeb-94eb-4794-b131-5891f2984000%2Fgit833_processed.png&w=3840&q=75)
Transcribed Image Text:Bond value and changing required returns Midland Utilities has a bond issue outstanding that will mature to its $1,000 par value in 15 years. The bond has a coupon interest rate of 13% and
pays interest annually.
a. Find the bond value if the required return is (1) 13%, (2) 17%, and (3) 10%.
b. Use your finding in part a and the graph here,
to discuss the relationship between the coupon rate, the required return and the market value of the bond relative to its par value.
c. What two possible reasons could cause the required return to differ from the coupon interest rate?
a. (1) The value of the bond, if the required return is 13%, is $
(Round to the nearest cent.)
![Graph/chart
Bond Value ($)
1,500
1,400-
1,300-
1,200-
1,100-
1,000+
900-
800-
700-
600-
500+
10
11 12 13 14 15
Required return (%)
16
17](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fab95af0c-8761-45ad-a409-00b969071184%2F97080eeb-94eb-4794-b131-5891f2984000%2Fr5lqcec_processed.png&w=3840&q=75)
Transcribed Image Text:Graph/chart
Bond Value ($)
1,500
1,400-
1,300-
1,200-
1,100-
1,000+
900-
800-
700-
600-
500+
10
11 12 13 14 15
Required return (%)
16
17
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