Figure 6.6 depicts the behavior of the bond values calculated earlier and presented in Table 6.6 for...

Figure 6.6 depicts the behavior of the bond values calculated earlier and presented in Table 6.6 for Mills Company’s 10% coupon interest rate bond paying annual interest and having 10 years to maturity. Each of the three required returns—12%, 10%, and 8%—is assumed to remain constant over the 10 years to the bond’s maturity. The bond’s value at both 12% and 8% approaches and ultimately equals the bond’s $1,000 par value at its maturity, as the discount (at 12%) or premium (at 8%) declines with the passage of time.

FIGURE 6.6

Time to Maturity and Bond Values Relationship among time tomaturity, required returns,and bond values (Mills

Company’s 10% coupon interest rate, 10-year maturity, $1,000 par, January 1, 2004, issue paying annual interest)

TABLE 6.6
Bond Values for Various Required Returns (Mills Company’s 10% Coupon Interest Rate, 10-Year Maturity, $1,000 Par, January 1, 2004, Issue Paying Annual Interest)
Required return, kd	Bond value, B0	Status
12%	$ 887.00	Discount
10	1,000.00	Par value
8	1,134.00	Premium