Lynn Parsons is considering investing in either of two outstanding bonds. The bonds both have $1,000 par values and 13% coupon interest rates and pay annual interest. Bond A has exactly 10years to maturity, and bond B has 20years to maturity.
a. Calculate the present value of bond A if the required rate of return is: (1) 10%, (2) 13%, and (3)16%.
b. Calculate the present value of bond B if the required rate of return is: (1) 10%, (2) 13%, and (3) 16%.
c. From your findings in parts a and b, discuss the relationship between time to maturity and changing required returns.
d. If Lynn wanted to minimize interest rate risk, which bond should she purchase? Why?