Bond value and time—Constant required returns Pecos Manufacturing has just issued a 15-year, 8% coupon interest rate, $1,000-par bond that pays interest annually. The required return is currently 12%, and the company is certain it will remain at 12% until the bond matures in 15 years. a. Assuming that the required return does remain at 12% until maturity, find the value of the bond with (1) 15 years, (2) 12 years, (3) 9 years, (4) 6 years, (5) 3 years, (6) 1 year to maturity. b. All else equal, when the required return differs from the coupon rate and is constant to maturity, what happens to the bond value as time passes? Explain in light of the following graph:
Bond value and time—Constant required returns Pecos Manufacturing has just issued a 15-year, 8% coupon interest rate, $1,000-par bond that pays interest annually. The required return is currently 12%, and the company is certain it will remain at 12% until the bond matures in 15 years. a. Assuming that the required return does remain at 12% until maturity, find the value of the bond with (1) 15 years, (2) 12 years, (3) 9 years, (4) 6 years, (5) 3 years, (6) 1 year to maturity. b. All else equal, when the required return differs from the coupon rate and is constant to maturity, what happens to the bond value as time passes? Explain in light of the following graph:
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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Pecos Manufacturing has just issued a 15-year, 8% coupon interest rate, $1,000-par bond that pays interest annually. The required return is currently 12%, and the company is certain it will remain at 12% until the bond matures in 15
years.
a. Assuming that the required return does remain at 12% until maturity, find the value of the bond with (1) 15 years, (2) 12 years, (3) 9 years, (4) 6 years, (5) 3 years, (6) 1 year to maturity.
b. All else equal, when the required return differs from the coupon rate and is constant to maturity, what happens to the bond value as time passes? Explain in light of the following graph:
Transcribed Image Text:Bond value and time-Constant required returns Pecos Manufacturing has just issued a 15-year, 8% coupon interest rate, $1,000-par bond that pays interest annually. The required return is currently 12%, and the company is certain it will remain at 12% until the bond matures in 15 years.
a. Assuming that the required return does remain at 12% until maturity, find the value of the bond with (1) 15 years, (2) 12 years, (3) 9 years, (4) 6 years, (5) 3 years, (6) 1 year to maturity.
b. All else equal, when the required return differs from the coupon rate and is constant to maturity, what happens to the bond value as time passes? Explain in light of the following graph:
a. (1) The value of the bond with 15 years to maturity is $
(Round to the nearest cent.)
Graph/chart
Bond Value ($)
1,300-
1,200-
1,100-
1,000+
900-
800-
700+
600-
500-
15
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Years to Maturity
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