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Evaluating bonds at various required return rates

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Quinn Electric Company has outstanding a bond issue that will mature to its $1,000 par value in 12 years. The bond has a coupon rate of 15% and pays the interest annually.

a) Find the value of the bond if the required return is (1) 10 percent, (2) 15 percent and (3) 17 percent.
b) Use your findings in part a) to discuss the relationship between coupon interest rate on a bond and the required return and the market value of the bond relative to its par value.
c) What two reasons cause the required return to differ from the coupon interest rate?

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Solution Summary

The solution aims at finding out value of bond at various required return rates. Bond make coupon payments annually. Relation ship between rate of required return and value of bond is discussed.

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Please see the attached file for complete details. Table may not print here properly.

Solution

Year End Cash Present Value of Cash Inflow at
Inflow 10.00% 15.00% 17.00%
1 150 136.4 130.4 128.2
2 150 124.0 113.4 109.6
3 150 112.7 98.6 93.7
4 ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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