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Lynn Parsons is considering investing in either of two outstanding bonds. The bonds both have ?$1,000 par values and 9?% coupon interest rates and pay annual interest. Bond A has exactly 10 years to? maturity, and bond B has 20 years to maturity.
a. Calculate the present value of bond A if the required rate of return? is: (1) 6?%, (2) 9?%, and? (3) 12?%.
b. Calculate the present value of bond B if the required rate of return? is: (1) 6?%, (2) 9?%, and? (3) 12?%.
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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