Question

Pecos Manufacturing has just issued a 15 year, 14% coupon interest rate, 1000-par bond that pays interest annually. The required return is currently 11%, and the company is certain it will remain at 11% until the bond mature in 15 years.

a. Assuming that the required return does remain at 11% until maturity, find the value of the bond with (1) 15 years, (2) 12 years, (3) 9 years, (4) 6 years, (5) 3 years, (6) 1 year to maturity.

b. 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 following graph

questionld 38flusheds true8icld- 52023218icenterwin ayes 4 of 7 (5 complete) a 15year, 14% couponinterest rate, $1,000-par bond that pays interest annualy The required return is currently 11%, and the company is certain t bond with (1) 15 years, (2) 12 years, (3) 9 years, (4)6 years, (5) 3 years, (6) 1 year to maturity and is assumed to be constant to maturity,what happens to the bond value as time moves toward maturity? Explain in light of the folowing graph: Graph/Chart Years to Maburity Print Don

Answer 1

Using caclulator TVM functions:

The inputs shall be:

N	15
I/Y	11%
FV	1,000.00
PMT	140

CPT PV= $1,215.73

At 12 years:

N	12
I/Y	11%
FV	1,000.00
PMT	140
CPT PV	$    1,194.77

At 9 years:

N	9
I/Y	11%
FV	1,000.00
PMT	140
CPT PV	$    1,166.11

At 6 years:

N	6
I/Y	11%
FV	1,000.00
PMT	140
CPT PV	$    1,126.92

At 1 year:

N	1
I/Y	11%
FV	1,000.00
PMT	140
CPT PV	$    1,027.03

A bond which has coupon rate higher than the yield shall be sold at premium . However as it approaches maturity, the price would decrease to par value. In the graph we can see that as the time to maturity decreases graph moves towards $1,000