The effect of changing required returns on bonds of differing maturity can be illustrated by using...

The effect of changing required returns on bonds of differing maturity can be illustrated by using Mills Company’s bond and Figure 6.6. If the required return rises from 10% to 12% (see the dashed line at 8 years), the bond’s value decreases from $1,000 to $901—a 9.9% decrease. If the same change in required return had occurred with only 3 years to maturity (see the dashed line at 3 years), the bond’s value would have dropped to just $952—only a 4.8% decrease. Similar types of responses can be seen for the change in bond value associated with decreases in required returns. The shorter the time to maturity, the less the impact on bond value caused by a given change in the required return.