Midland Utilities has a bond issue outstanding that will mature to its $1,000 par value in12 years. The bond has a coupon interest rate of 12% and pays interest annually. a. Find the bond value if the required return is (1) 12%, (2)16%, and (3) 9%. b. Use your finding in part a and the graph attached 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?
Midland Utilities has a bond issue outstanding that will mature to its $1,000 par value in12 years. The bond has a coupon interest rate of 12% and pays interest annually. a. Find the bond value if the required return is (1) 12%, (2)16%, and (3) 9%. b. Use your finding in part a and the graph attached 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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Midland Utilities has a bond issue outstanding that will mature to its $1,000 par value in12 years. The bond has a coupon interest rate of 12%
and pays interest annually.
a. Find the
9%.
b. Use your finding in part a and the graph attached
to discuss the relationship between the coupon
c. What two possible reasons could cause the required return to differ from the coupon interest rate?
Transcribed Image Text:Bond Value ($)
C
aph/chart
1,500-
1,200
%24
1,100-
-00-
-00-
6.
Required return (%)
10 11
12 13
14 15
Print
Done
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