Question

Bond value and time—Constant required returns???Pecos Manufacturing has just issued a 15?-year, 16?% coupon interest? rate, $1,000?-par bond that pays interest annually.??The required return is currently 15?%, and the company is certain it will remain at 15?% until the bond matures in 15 years.

a.??Assuming that the required return does remain at 15?% 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

Years to maturity	Price of bond
15	$       1,058.47	=PV(15%,15,160,1000)*-1
12	$       1,054.21	=PV(15%,12,160,1000)*-1
9	$       1,047.72	=PV(15%,9,160,1000)*-1
6	$       1,037.84	=PV(15%,6,160,1000)*-1
3	$       1,022.83	=PV(15%,3,160,1000)*-1
1	$       1,008.70	=PV(15%,1,160,1000)*-1
Bond price is decreasing with decrease in years to maturity.