Bond value and changing required returns Midland Utilities has outstanding a bon

ID: 2621229 • Letter: B

Question

Bond value and changing required returns Midland Utilities has outstanding a bond issue that will mature to its S1 000 par value in 1 years The bond has a coupon terest rate of 8% and pays erst an aly a. Find the value of the bond if the required return is (1) 8%, (2) 12%, and (315% 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 market 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) lhe value of the bond ifthe required return is 8%. is Round to the nearest cent)

Explanation / Answer

Using financial calculator BA II Plus - Input details:

At 8% return

At 12% return

At 5% return

I/Y = Rate or yield / frequency of coupon in a year =

8.00

12.00

5.00

PMT = Payment = Coupon / frequency of coupon =

-$80.00

N = Total number of periods = Years x frequency of coupon =

FV = Future Value =

-$1,000.00

CPT > PV = Bond Value =

$1,000.00

$762.49

$1,249.19

Bond Value at 8% return = $1,000

Bond Value at 12% return = $762.49

Bond Value at 5% return = $1,249.19

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Bond price is inversely related with yield or required rate of return.

If coupon rate is equal to required rate then bond will be traded at par

If coupon rate is less than required rate then bond will be traded at discount

If coupon rate is more than required rate then bond will be traded at premium