Question

Bond value and time—Constant required returns

Pecos Manufacturing has just issued a 15-year, 14% coupon interest rate, $1,000-par bond that pays interest annually. The required return is currently 13%, and the company is certain it will remain at 13% until the bond matures in 15 years.

a. Assuming that the required return does remain at 13% until maturity, find the value of the bond with (1) 15 years, (2) 12 years, (3) 9 years, (4) 6 years, (5) 3 years, (6) 1 year to maturity.

b. All else remaining the same, when the required return differs from the coupon interest rate and is assumed to be constant to maturity, what happens to the bond value as time moves toward maturity?

Step 1

**a.**

**Calculation of Value of Bond if the maturity period is 15 years, 12 years, 9 years, 6 years, 3 years and 1 year:**

The value of bond if the maturity period is 15 years is ** $1,064.62**, 12 years is

**Excel Spreadsheet:**

Step 2

**Excel Workings:**

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