Problem 11.16

Lynn Parsons is considering investing in either of two outstanding bonds. The bonds both have $1,000 par values and 11% coupon interest rates and pay annual interest. Bond A has exactly 5 years to maturity, and bond B has 15 years to maturity.

1. Calculate the value of bond A if the required return is (1) 8%, (2) 11%, and (3)14%
2. Calculate the value of bond B if required return is (1) 8%, (2) 11%, and (3) 14%
3. From your findings in parts a and b, complete the following table, and discuss the relationship between time to maturity and changing required returns.

Require Return Value of Bond A Value of Bond B

8% ? ?

11% ? ?

14% ? ?

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