A RECENT STUDY OF INFLATIONARY EXEPECTATION/TUTORIALOUTLET DOT COM A RECENT STUDY OF INFLATIONARY EXEPECTATION/TUTORI | Page 3

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. Use your findings in parts a and b to discuss the relationship
between the coupon interest rate on a bond and the required return
and the market value of the bond relative to its par valued. What two
possible reasons could cause the required return to differ from
thecoupon interest rate?
P6–18 Bond value and time: Constant required returns Pecos
Manufacturing has just issued
a 15-year, 12% coupon interest rate, $1,000-par bond that pays
interest annually.
The required return is currently 14%, and the company is certain it
will remain
at 14% until the bond matures in 15 years.
a. Assuming that the required return does remain at 14% until
maturity, find the
value of the bond with (1) 15 years, (2) 12 years, (3) 9 years, (4) 6
years, (5) 3
years, and (6) 1 year to maturity.
b. Plot your findings on a set of “time to maturity (x axis)–market
value of bond
(y axis)” axes constructed similarly to Figure 6.5 on page 252.
c. All else remaining the same, when the required return differs from
the coupon