Bond value and time: Changing required returns Lynn Parsons is considering investing in either of two...

Bond value and time: Changing required returns Lynn Parsons is considering investing in either of two outstanding bonds. The bonds both have $1,000 par values and 11% coupon rates and pay annual interest. Bond A has exactly 5 years to maturity, and bond B has 15 years to maturity. Calculate the value of bond A if the required return is (1) 8%, (2) 11%, and (3) 14%. Calculate the value of bond B if the required return is (1) 8%, (2) 11%, and (3) 14%. From your findings in parts a and b, complete the following table, and discuss the relationship between time to maturity and changing required returns. Required return Value of bond A Value of bond B 8% ? ? 11 ? ? 14 ? ? If Lynn wants to minimize interest rate risk, which bond should she purchase? Why?

Solutions

Expert Solution

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Bond value and time—Changing required returns Lynn Parsons is considering investing in either of two outstanding...

Bond value and time—Changing required returns 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 9 years to maturity, and bond B has 19 years to maturity. a. Calculate the present value of bond A if the required rate of return is: (1) 9%, (2) 12%, and (3) 15%. b. Calculate the present value of bond B if...

Bond value and time—Changing required returns Personal Finance Problem Lynn Parsons is considering investing in either...

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 13% coupon interest rates and pay annual interest. Bond A has exactly 10 years to maturity, and bond B has 20 years to maturity. a. Calculate the present value of bond A if the required rate of return is: (1) 10%, (2) 13%, and (3) 16%. b. Calculate the present value of...

Bond value and time-Changing required returns Personal Finance Problem Lynn Parsons is considering investing in either...

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 6 years to maturity, and bond B has 16 years to maturity. a. Calculate the present value of bond A if the required rate of return is: (1) 9%, (2) 12%, and (3) 15%. b. Calculate the present value of...

Bond value and timelong -Changing required returns Personal Finance Problem Lynn Parsons is considering investing in...

Bond value and timelong -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 14% 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 of return is: (1) 11%, (2) 14%, and (3) 17%. b. Calculate the present...

Bond value and timelong dashChanging required returns Personal Finance Problem Lynn Parsons is considering investing in...

Bond value and timelong dashChanging required returns Personal Finance Problem Lynn Parsons is considering investing in either of two outstanding bonds. The bonds both have $1 comma 000 par values and 8% coupon interest rates and pay annual interest. Bond A has exactly 9 years to maturity, and bond B has 19 years to maturity. a. Calculate the present value of bond A if the required rate of return is: (1) 5%, (2) 8%, and (3) 11%. b. Calculate the...

Question 6-19 Bond value and time – changing required return Lynn Pityana is considering investing in...

Question 6-19 Bond value and time – changing required return Lynn Pityana is considering investing in either of two outstanding bonds. The bonds both have R1,000 par values and 11% coupon interest rates and pay annual interest Bond A has exactly five years to maturity and Bond B has 15 years to maturity Calculate the value of bond A if the required return is (1) 8% and (2) 11% and (3) 14% Calculate the value of bond B if the...

. Lynn Parsons is considering investing in either of two outstanding bonds. The bonds both have...

. Lynn Parsons is considering investing in either of two outstanding bonds. The bonds both have $1000 par values and 11 % coupon interest rates and pay annual interest. Bond A has exactly 9 years to maturity, and bond B has 19 years to maturity. a. Calculate the present value of bond A if the required rate of return is: (1) 8 %, (2) 11 %, and (3) 14 %. b. Calculate the present value of bond B if the...

Bond value and changing required returns Bond X pays an 8% annual coupon and Bond Y pays...

Bond value and changing required returns Bond X pays an 8% annual coupon and Bond Y pays a 4% annual coupon. Both bonds have 10 years to maturity. The yield to maturity for both bonds is now 8%. a. If the interest rate suddenly rises by 2%, by what percentage will the price of the two bonds change? b. If the interest rate suddenly drops by 2%, by what percentage will the price of the two bonds change? c. Which bond...

KORONA Manufacturing is considering investing in either of two mutually exclusive projects, A and B. The...

KORONA Manufacturing is considering investing in either of two mutually exclusive projects, A and B. The firm has a 14 percent cost of capital, and the risk-free rate is currently 9 percent. The initial investment, expected cash inflows, and certainty equivalent factors associated with each of the projects are shown in the following table. Project A Project B Initial investment (II) $ 40,000 $ 56,000 Year (t) Cash inflows (CFt) Certainty equivalent factors (αt) Cash inflows (CFt) Certainty equivalent factors...

Inno Tech Inc. is considering investing in either of two competing projects that will allow the...

Inno Tech Inc. is considering investing in either of two competing projects that will allow the firm to eliminate a production bottleneck and meet the growing demand for its products. The firm’s engineering department narrowed the alternatives down to two – Status Quo (SQ) and High Tech (HT). Working with the accounting and finance managers, the firm’s CFO developed the following estimates of the cash flows for SQ and HT over the relevant six-year time horizon. The firm has an...

Subjects