Posted: March 23rd, 2017

# If Lynn wanted to minimize interest rate risk, which bond should she purchase? Why?

Bond value and time: Changing required returns Lynn Parsons is considering investing

in either of two outstanding bonds. The bonds both have \$1,000 par values and

11% coupon interest rates and pay annual interest. Bond A has exactly 5 years to

maturity, and bond B has 15 years to maturity.

1. Calculate the value of bond A if the required return is (1) 8%, (2) 11%, and

(3) 14%.

1. Calculate the value of bond B if the required return is (1) 8%, (2) 11%, and

(3) 14%.

1. From your findings in parts a and b, complete the following table, and discuss

the relationship between time to maturity and changing required returns.

Required return Value of bond A Value of bond B

8% ? ?

11 ? ?

14 ? ?

Bond Coupon interest rate Yield to maturity Price

A 6% 10%

B 8 8

C 9 7

D 7 9

E 12 10

Bond Par value Coupon interest rate Years to maturity Current value

A \$1,000 9% 8 \$ 820

B 1,000 12 16 1,000

C 500 12 12 560

D 1,000 15 10 1,120

E 1,000 5 3 900

1. If Lynn wanted to minimize interest rate risk, which bond should she purchase?

Why?

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