Pecos Manufacturing has just issued a 15-year, 12% coupon interest rate, $1,000-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 constructed similarly to Figure 6.5 on page 252.
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.
This solution solves a question related to bond value.
Time Value of Money in bond market value; zero growth in common stock
Valuation of common stock and bonds is an important financial task for investors. In the process of valuing bonds describe the relationship of time to maturity and market value (for premium, par-value, and discount bonds) and the relationship of required return to market value.
For common stock define the zero growth (dividend) model, the variable growth (dividend) model and the free cash flow valuation model. In addition to defining these models discuss at least 2 weaknesses of these models.View Full Posting Details