Bond value and

timeChanging

required returnsPersonal Finance Problem Lynn Parsons is considering investing in either of two outstanding bonds. The bonds both have

$1,000

par values and

12%

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)

9%,

(2)

12%,

and (3)

15%.

b.Calculate the present value of bond B if the required rate of return is: (1)

9%,

(2)

12%,

and (3)

15%.

c. 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?

Question content area bottom

Part 1

a. (1) The value of bond A, if the required return is

9%,

is

$enter your response here.

(Round to the nearest cent.)

Part 2

(2) The value of bond A, if the required return is

12%,

is

$enter your response here.

(Round to the nearest cent.)

Part 3

(3) The value of bond A, if the required return is

15%

is

$enter your response here.

(Round to the nearest cent.)

Part 4

b.(1) The value of bond B, if the required return is

9%,

is

$enter your response here.

(Round to the nearest cent.)

Part 5

(2) The value of bond B, if the required return is

12%,

is

$enter your response here.

(Round to the nearest cent.)

Part 6

(3) The value of bond B, if the required return is

15%,

is

$enter your response here.

(Round to the nearest cent.)

Part 7

c. From your findings in parts a and

b,

discuss the relationship between time to maturity and changing required returns.The greater the length of time to maturity, the

more

less

responsive the market value of the bond is to changing required returns, and vice versa.(Select from the drop-down menus.)

Part 8

d.If Lynn wanted to minimize interest rate risk, which bond should she purchase? Why? (Select the best answer below.)

She should purchase bond A because its price is more responsive to changes in interest rates.

She should purchase bond A because its price is less responsive to changes in interest rates.

She should purchase bond B because its price is more responsive to changes in interest rates.

She should purchase bond B because its price is less responsive to changes in interest rates.