Bond value and time—Changing required returns Lynn Parsons is considering investing in either of two outstanding bonds. The bonds both have $1,000 par values and 11% coupon interest rates and pay annual interest. Bond A has exactly 5 years to maturity, and bond B has 15 years to maturity.
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 | Value of bond A | Value of bond B |
8% | ? | ? |
11 | ? | ? |
14 | ? | ? |
d. If Lynn wanted to minimize interest rate risk, which bond should she purchase? Why?
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