Pecos Manufacturing has just issued a 15-year, 12% coupon interest rate, $1,000-par bond that pays interest annually.

Question:

Pecos Manufacturing has just issued a 15-year, 12% coupon interest rate, $1,000-par bond that pays interest annually. The required return is currently 14%, and the company is certain it will remain at 14% until the bond matures in 15 years.

a. Assuming that the required return does remain at 14% until maturity, find the value of the bond with

(1) 15 years,

(2) 12 years,

(3) 9 years,

(4) 6 years,

(5) 3 years, and

(6) 1 year to maturity.

b. Plot your findings on a set of “time to maturity (x axis)–market value of bond (y axis)” axes constructed similarly to Figure 6.5 on page 246.

c. All else remaining the same, when the required return differs from the coupon interest rate and is assumed to be constant to maturity, what happens to the bond value as time moves toward maturity? Explain in light of the graph in part b.

Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...