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

13%

coupon interest rates and pay annual interest. Bond A has exactly

10

years to maturity, and bond B has

20

years to maturity.

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

10%,

(2)

13%,

and (3)

16%.

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

10%,

(2)

13%,

and (3)

16%.

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?