Question

Bond value and changing required returns Midland Utlities has a bond issue outstanding that will mature to its $1,000 par value in 15 years. The bond has a coupon interest rate of 14% and pays interest annually a. Find the value of the bond if the required return is (1) 14%, (2) 1896, and (3) 1196. 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 maket 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? a. (1) The value of the bond if the required return is 14%, is Round to the nearest cent) (2) The value of the bond, if the required return is 18%, is S -Round to the nearest cent) (3) The value of the bond, if the required return is 11%, is SL (Round to the nearest cent) b. Use your finding in part a and the graph here,to answer the following questions: (Select from the drop-down menus) When the required return is less than the coupon rate, the market value is When the required return is equal to the coupon rate, the market value is When the required return is greater than the coupon rate, the market value is c. What two possible reasons could cause the required return to differ from the coupon interest rate? (Select the best answer below.) V the par value. V the par value. V the par value. A. B. C. D. Firm's risk has changed. Cost of funds has changed. Bond contract has changed. Tax rate has changed.

Answer 1

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