Lynn Parsons is considering investing in either of two outstanding bonds. The bonds both have $1000...
Lynn Parsons is considering investing in either of two outstanding bonds. The bonds both have $1000
par values and 9% coupon interest rates and pay annual interest. Bond A has exactly 6 years to maturity, and bond B has 16 years to maturity.
a. Calculate the present value of bond A if the required rate of return is: (1) 6%, (2) 9%,and (3) 12%.
b. Calculate the present value of bond B if the required rate of return is: (1) 6%, (2) 9% and (3) 12%.
c. From your findings in parts a and b discuss the relationship between time to maturity and changing required returns.
d. If Lynn wanted to minimize interest rate risk, which bond should she purchase? Why?
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Lynn Parsons is considering investing in either of two
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