Lynn Parsons is considering investing in either of two outstanding bonds. The bonds both have ?$1,000 par values and 12?% coupon interest rates and pay annual interest. Bond A has exactly 6 years to? maturity, and bond B has 16 years to maturity.
a. Calculate the present value of bond A if the required rate of return? is: (1) 9?%, ?(2) 12?%, and? (3) 15?%.
b. Calculate the present value of bond B if the required rate of return? is: (1) 9?%, (2) 12?%, and? (3) 15?%.
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?