Pecos Manufacturing has just issued a 15-year, 12% coupon interest rate, $1000-p

ID: 2653219 • Letter: P

Question

Pecos Manufacturing has just issued a 15-year, 12% coupon interest rate, $1000-par bond that pays interest annually. The required return is currently 14%, and the company is certain it will remain at 14% until the bond matures in 15 years.

a.) Assuming that the required return does remain at 14% until maturity, find the value of the bond with (1) 15 years, (2) 12 years, (3) 9 years, (4) 6 years, (5) 3 years, and (6) 1 year to maturity.

b.) Plot your findings on a set of "time to maturity (x axis)- market value of bond (y axis)" axes.

c.) 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? Explain in light of the graph in part b.

Explanation / Answer

Solution:

a.)

Year to maturity

Calculation

Amount ( $ )

Annual Interest * PVAF( 14 % , 15 Years) Redeemable Value * PVIF( 14 %, 15 Years)

( 120 * 6.14216 ) + ( 1,000 * 0.1401)

877.1592

( 120 * 5.6602) + ( 1,000 * 0.2076)

886.824

( 120 * 4.94637) + ( 1,000 * 0.3075)

901.0644

( 120 * 3.8886) + (1,000 * 0.4556)

922.232

( 120 * 2.3216) + (1,000 * 0.675)

953.592

( 120 *0.87719) + (1,000 *0.87719)

982.4628

b.) Graph showing time to maturity (x axis)- market value of bond (y axis)

c.) The Value of Bond increases, when time moves toward maturity.