Question

Laura Drake just inheritance some cash from her late grandparents. She is considering to invest the cash into either of two bond outstanding. Both bonds do have par value of $1,000 and 11 percent coupon paid annually. Bond A do have 10 years to maturity while bond B have 5 years to maturity. *

(a) Determine the value of bond A in the required returns is (i) 8 percent, (ii) 11 percent and (iii) 14 percent. (b) Determine the value of bond B in the required returns is (i) 8 percent, (ii) 11 percent and (iii) 14 percent. (c) From the findings in (a) and (b), discuss the relationship between time to maturity and changing required returns. (d) If Laura is afraid of interest rate risk, which bond should she purchase? Justify your answer.

Answer 1