Question

Bond value and timelong dash Constant required returns   Pecos Manufacturing has just issued a 15 ​-year, 15 ​% coupon interest​ rate, ​$1000 ​-par bond that pays interest annually.  The required return is currently 14 ​%, and the company is certain it will remain at 14 ​% until the bond matures in 15 years. a.  Assuming that the required return does remain at 14 ​% 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:

Answer 1