Bond value and time Constant required returns. Pecos Manufacturing has just issued a 15 year, 9% coupon interest rate, $1,000 par bond that pays interest annually. The required return is currently 15 %, and the company is certain it will remain at 16 % until the bond matures in years in 15 years
a. Assuming that the required return does remain at 16% until maturity, find the value of the bond with (1) 15 years, (2) 12 years, (3) 9 years, (4) 6 years, (5) 3 years, (6) 1 year to maturity.
b. All else remaining the same, when the required return differs from the coupon interest rate and is assumed to be constant to maturity, what happens to the bond value as time moves toward maturity? Explain in light of a graph:
1. When the bond was issued, the number of years to maturity, n, was _____ years. (Type a whole number.)
2. The required rate of return on the bond, r , is _____%. (Type a whole percentage.)
3. The annual interest payment, I, is ________$ . (Round to the nearest dollar.)
4. The par value of the bond, M, is $______ . (Round to the nearest dollar.)
5. The value of the bond with 15 years to maturity is _______$ . (Round to the nearest cent.)
Find the present values of the bond with different years to maturity.
(3) The value of the bond with 12 years to maturity is _____ $ . (Round to the nearest cent.)
(4) The value of the bond with 9 years to maturity is _____$ . (Round to the nearest cent.)
(5) The value of the bond with 6 years to maturity is _______ $ . (Round to the nearest cent.) (
(6) The value of the bond with 3 years to maturity is $ ______. (Round to the nearest cent.)
(7) The value of the bond with 1 year to maturity is $ . (Round to the nearest cent.)
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? (Select the best answer below)
A. The bond value approaches the amount of the last interest payment.
B. The bond value approaches zero.
C. The bond value approaches the par value.
D. The bond value approaches infinity
Use an Excel Spreadsheet to show your computations.