Midland Utilities has outstanding a bond issue that will mature to its $1,000 par value in 12 years. The bond has a coupon interest rate of 11% and pays interest annually.
a. Find the value of the bond if the required return is
(1) 11%,
(2) 15%, and
(3) 8%.
b. Plot your findings in part a on a set of "required return (x axis)-market value of bond (y axis)" axes.
c. What is the relationship between price (aka market value) and par value when the required return is lower than the coupon interest rate?
d. What is the relationship between price and par value when the required return is higher than the coupon interest rate?
e. What is the relationship between price and par value when the required return is equal to the coupon interest rate?