Bond value and time: changing required returns. 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 5 years to mature and bond B has 15 years to maturity.
For parts a and b from the textbook, show how each bond calculation was set up and clearly identify each answer. (Only use the keystroke variables from a financial calculator.)
A. Calculate the value of bond A if the required return is (1) 8%, (2) 11% AND (3) 14%
B. Calculate the value of bond B if the required return is (1) 8%, (2)11% and (3) 14%
C. 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 vaue of bond a value of bond b
8% ? ?
11 ? ?
14 ? ?
Refer to part c from the textbook: Based on the student's answers from parts a and b, discuss the relationship between time to maturity and changes in the required return (do not show the table information). Which bond is considered more risky? (Explain your answer.)
D. If lynn wanted to minimize the interest rate risk which bond should she purchase? why?
Which bond would minimize interest rate risk? (Discuss your reason for your selection and how that bond could minimize interest rate risk.)