Question

Bond value and time-Changing required returns Personal Finance Problem Lynn Parsons is considering investing in either of two outstanding bonds. The bonds both have $1,000 par values and 12 % coupon interest rates and pay annual interest. Bond A has exactly 8 years to maturity, and bond B has 18 years to maturity. a. Calculate the present value of bond A if the required rate b. Calculate the present value of bond B if the required rate of return is: (1) 9%, (2) 12%, and (3) 15%. c. From your find ings 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? return is: (1) 9%, (2) 12%, and (3) 15%.

Answer 1

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OND -Microsoft Excel (Product File Home Insert Page Layout Formulas Data Review View Add-Ins Cut Ea Copy - AutoSum General A A Wrap Text Calibri 11 Fill A- Merge & Center Conditional Format Formatting Insert Delete Format Paste BIU S % Cell Sort & Find & 2 Clear Format Painter er Select ble Styles Clipboard Font Alignment Number Shules Cells Editing NX1 NT OB OC OF NR NS NU NV NW NX NY NZ OA OD OE 1 (a) BOND A (b) BOND B 2 FV 1000 EV 1000 COUPON 12% COUPON 12% 4 YEAR 8 YEARS 18 PV AT 9% 6 PV AT 9 % 7 YTM 9% YTM 9% 1 PV 1166.04 [-PV(NT7,NT4,-NT3 *NT2,-NT2)] 1 PV 1262.67 [PV(OB7,OB4,-OB3*OB2,-OB2)] 8 10 11 PV AT 12% PV AT 12% YTM 12 YTM 12% 12% 2 PV 13 2 PV 1000.00 PV(NT12, NT4,- NT3*NT2,-NT2)] 1000.00 PV(OB12,OB4,-OB3*OB2,-OB2)] 14 15 PV AT 15% PV AT 15% 16 3 YTM 15% 3 YTM 15% 816.16 PV(OB16,OB4,-OB3*OB2,-OB2)] 17 865.38 PV(NT16, NT4,-NT3*NT2,-NT2)] PV PV 18 19 14 YIELD SPOT Sheet2 AFN BANKINGNOTE BIDDING, UNDERWRITING EUAC AW PM LIFE LP, IP, MRP, INFLATION YIELD WARRANTrefund bond CLEAN INVOICE PRICE Sheet 130% O Re erences W 05:21 ENG 7-06-2019

OND -Microsoft Excel (Product File Home Insert Page Layout Formulas Data Review View Add-Ins - Cut AutoSum General A A Wrap Text Calibri 11 Fill Copy A- Merge & Center Conditional Format Insert Delete Format Paste BIU S % Cell Sort & Find & 2 Clear Format Painter er Select ble Styles Formatting Clipboard Font Alignment Number Shules Cells Editing NX30 NT NZ OB OC OD NR NS NU NV NW NX NY OA OE OF 19 20 21 (c) THE RELATION BETWEEN TIME TO MATURITY & CHANGING REQUIRED RETURNS THE GREATER THE LENGTH OF TIME TO MATURITY, THE HIGHER/MORE RESPONSIVE THE MARKET VALUE OF THE BOND TO THE CHANGING 22 23 REQUIRED RETURNS & VICE VERSA 24 25 (d) IF LYNN WANTS TO MINIMISE INTEREST RATE RISK, WHICH BOND SHE SHOULD PURCHASE 26 ANS SHE SHOULD PURCHASE BOND A AS PRICE IS LESS RESPONSIVE TO CHANGES IN INTEREST RATES 27 28 29 30 31 32 33 34 35 36 37 4 YIELD SPOT Sheet2 AFN BANKING NOTE BIDDING, UNDERWRITING EUAC AW PM LIFE LP, IP, MRP, INFLATION YIELD WARRANTrefund bond CLEAN INVOICE PRICE Sheet 130% Re erences W 05:21 ENG 27-06-2019