Question
P6-22 Interest rate risk and bond price changes Apex Corp. has two outstanding bond issues. One issue consists of 7% annual coupon bonds and the
P6-22 Interest rate risk and bond price changes Apex Corp. has two outstanding bond issues. One issue consists of 7% annual coupon bonds and the other issue consists of zero-coupon bonds. Both bonds have a $1,000 par value. For each bond, calculate the bond price and the percentage change in price when the required rate of return changes as described below.
Ten years to maturity and the required rate of return goes from 7% to 8%.
Twenty years to maturity and the required rate of return goes from 7% to 8%.
Ten years to maturity and the required rate of return goes from 7% to 6%.
Twenty years to maturity and the required rate of return goes from 7% to 6%.
Compare and contrast your answers for parts a through d and comment on your observations.
P6-23 Bond value and time: Constant required returns Pecos Manufacturing has just issued a 15-year, 12% coupon rate, $1,000-par bond that pays interest annually. The required return is currently 14%, and the company is certain it will remain at 14% until the bond matures in 15 years.
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.
Plot your findings on a set of "time to maturity (x-axis)-market value of bond (y-axis)" axes constructed similarly to Figure 6.6.
All else equal, when the required return differs from the coupon rate and is constant to maturity, what happens to the bond value as time passes? Explain your answer in light of the graph in part b.
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