Question
P618 Bond value and time: Constant required returns Pecos Manufacturing has just is sued a 15-year, 12% coupon interest rate, $1,000-par bond that pays interest
P618
Bond value and time: Constant required returns Pecos Manufacturing has just is sued a 15-year, 12% coupon interest rate, $1,000-par bond that pays interest annu ally. 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 252.
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.
***Please answer all parts A thru C, and plus show work in excel. Please include steps to set up proper graph for Part B. Thank you*** :)
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