Bond value and time---Constant required returns Pecos
Manufacturing has just issued a 15-year, 9% coupon interest rate,
$1,000-par bond that pays interest annually. The required return is
currently 13%, and the company is certain it will remain at 13%
until the bond matures in 15 years. Assuming that the required
return does remain at 13% until maturity, find the value of the
bond with (1) years, (2) 12 years, (3) 9 years, (4) 6
years, (5) 3 years, (6) 1 year to maturity. 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:
Bond value and time---Constant required returns Pecos Manufacturing has just issued a 15-year, 9% coupon interest rate
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