Bond value and time—Changing required returns Personal Finance Problem Lynn Parsons is considering investing in either of two outstanding bonds. The bonds both have $1,000 par values and 9% coupon interest rates and pay annual interest. Bond A has exactly 7 years to maturity, and bond B has 17 years to maturity. a. Calculate the present value of bond A if the required rate of return is: (1) 6%, (2) 9%, and (3) 12%. b. Calculate the present value of bond B if the required rate of return is: (1) 6%, (2) 9%, and (3) 12%. From your findings in parts a and b, discuss the relationship between time to maturity and changing required returns. d. If Lynn wanted to minimize interest rate risk, which bond should she purchase? Why?
Bond value and time—Changing required returns Personal Finance Problem Lynn Parsons is considering investing in either of two outstanding bonds. The bonds both have $1,000 par values and 9% coupon interest rates and pay annual interest. Bond A has exactly 7 years to maturity, and bond B has 17 years to maturity. a. Calculate the present value of bond A if the required rate of return is: (1) 6%, (2) 9%, and (3) 12%. b. Calculate the present value of bond B if the required rate of return is: (1) 6%, (2) 9%, and (3) 12%. From your findings in parts a and b, discuss the relationship between time to maturity and changing required returns. d. If Lynn wanted to minimize interest rate risk, which bond should she purchase? Why?
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 time—Changing required returns
Lynn Parsons is considering investing in either of two outstanding bonds. The bonds both have $1,000 par values and 9% coupon interest rates and pay annual interest. Bond A has exactly 7 years to maturity, and bond B has 17 years to maturity.
a. Calculate the present value of bond A if the required
b. Calculate the present value of bond B if the required rate of return is: (1) 6%, (2) 9%, and (3) 12%.
- From your findings in parts a and b, discuss the relationship between time to maturity and changing required returns.
d. If Lynn wanted to minimize interest rate risk, which bond should she purchase? Why?
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