Bond value and

timelong dashConstant

required returnsPecos Manufacturing has just issued a

1515-year,

88%

coupon interest rate,

$1 comma 0001,000-par

bond that pays interest annually.The required return is currently

1717%,

and the company is certain it will remain at

1717%

until the bond matures in

1515

years.

a.Assuming that the required return does remain at

1717%

until maturity, find the value of the bond with (1)

1515

years, (2) 12 years, (3) 9 years, (4) 6 years, (5) 3 years, (6) 1 year to maturity.

b.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 following graph:

.

Graph/Chart 1,300 1,200- 1,100 1,000- 900 800 700 600- 500- 15 Years to Maturity Print Done Graph/Chart 1,300 1,200- 1,100 1,000- 900 800 700 600- 500- 15 Years to Maturity Print Done