Answered: 1,500- 1,400- 1,300 1,200- 1,100 1,000-…

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1,500- 1,400- 1,300 1,200- 1,100 1,000- 900- 800- 700- 600- 500+ 7 11 8 9 10 12 13 Required return (% Bond Value ($) CO

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter12: Capital Structure

Section: Chapter Questions

Problem 1PROB

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Question

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Bond value and changing required returns Midland Utilities has a bond issue outstanding that will mature to its $ 1000 par value in 17 years. The bond has a coupon interest rate of 9% and pays interest annually.
a. Find the value of the bond if the required return is (1) 9%, (2) 13%, and (3) 6%.
b. Use your finding in part a and the graph here, 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 value.
c. What two possible reasons could cause the required return to differ from the coupon interest rate?

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Required return (%
Bond Value ($)
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Definition Definition Calculates the present value of a bond's expected future periodic coupon payments. Bond valuation determines the theoretical fair value of a particular bond and helps investors estimate what rate of return they could expect. The bond's theoretical fair value is computed by discounting the future cash flows or coupon payments by an applicable discount rate.

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