Bond Value and Time; Constant Required Returns LPI has just issued an 18-year, 8.5% coupon, $1000-par-value bond that pays interest annually. The required rate of return is currently 10%, and the company expects the required rate of return to remain at 10% until the bond matures in 18 years. a. 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. b. 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. c. 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.
Bond Value and Time; Constant Required Returns LPI has just issued an 18-year, 8.5% coupon, $1000-par-value bond that pays interest annually. The required rate of return is currently 10%, and the company expects the required rate of return to remain at 10% until the bond matures in 18 years. a. 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. b. 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. c. 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.
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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Transcribed Image Text:4. Bond Value and Time; Constant Required Returns
LPI has just issued an 18-year, 8.5% coupon, $1000-par-value
bond that pays interest annually. The required rate of return is
currently 10%, and the company expects the required rate of
return to remain at 10% until the bond matures in 18 years.
a. 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.
b. 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.
c. 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.
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