Bond value and timelong dashChanging required returns Personal Finance Problem Lynn Parsons is considering investing in either of two outstanding bonds. The bonds both have $1 comma 000 par values and 13 % coupon interest rates and pay annual interest. Bond A has exactly 5 years to maturity, and bond B has 15 years to maturity. a. Calculate the present value of bond A if the required rate of return is: (1) 10 %, (2) 13 %, and (3) 16 %. b. Calculate the present value of bond B if the required rate of return is: (1) 10 %, (2) 13 %, and (3) 16 %. 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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Gardner

12 September, 20:13

Bond value and timelong dashChanging required returns Personal Finance Problem Lynn Parsons is considering investing in either of two outstanding bonds. The bonds both have $1 comma 000 par values and 13 % coupon interest rates and pay annual interest. Bond A has exactly 5 years to maturity, and bond B has 15 years to maturity. a. Calculate the present value of bond A if the required rate of return is: (1) 10 %, (2) 13 %, and (3) 16 %. b. Calculate the present value of bond B if the required rate of return is: (1) 10 %, (2) 13 %, and (3) 16 %. 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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Bria Washington · Answer 1

Check the explanation

Explanation:

Present value = - PV (Rate, Nper, Pmt, Fv)

A) Bond A 6% = = -PV (0.06,9,90,1000) = 1204.05

Bond A 9% = = -PV (0.09,9,90,1000) = 1000

Bond A 12% = = -PV (0.12,9,90,1000) = 840.15

B) Bond B 6% = = -PV (0.06,19,90,1000) = 1334.74

Bond B 9% = = -PV (0.09,19,90,1000) = 1000

Bond B 12% = = -PV (0.12,19,90,1000) = 779.03

C) Relationship is: Bond with longer maturity is more impacted by the change in interest rate than bond with shorter maturity.

D) Lynn should purchase Bond A as it has lower maturity therefore having lower interest rate risk.