P6-17 

Bond value and changing required returns Midland Utilities has a bond issue out-standing that will mature to its $1,000 par value in 12 years. The bond has a coupon rate of 11% and pays interest annually.

a. Find the value of the bond if the required return is (1) 11%, (2) 15%, and (3) 8%

b. Plot your findings in part a on a set of "required return (x-axis)-market value of bond (y-axis)" axes.

c. Use your findings in parts a and b to discuss the relationship between the coupon rate on a bond and the required return and the market value of the bond relative to its par value.

d. What two possible reasons could cause the required return to differ from the coupon rate?

P6-19 

Bond value and time: Changing required returns Lynn Parsons is considering invest-ing in either of two outstanding bonds. The bonds both have $1,000 par values and 11% coupon rates and pay annual interest. Bond A has exactly 5 years to maturity, and bond B has 15 years to maturity.

a. Calculate the value of bond A if the required return is (1) 8%, (2) 11%, and (3) 14%.

b. Calculate the value of bond B if the required return is (1) 8%, (2) 11%, and (3) 14%.

c. From your findings in parts a and b, complete the following table, and discuss the relationship between time to maturity and changing required returns.

Required Return: 8%, 11%, 14%

Value of bond A: ?, ?, ?

Value of bond B: ?, ?, ?

d. If Lynn wants to minimize interest rate risk, which bond should she purchase? Why?