Posted: March 23rd, 2017

What two possible reasons could cause the required return to differ from the coupon interest rate?

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

issue that will mature to its $1,000 par value in 12 years. The bond has a coupon

interest rate of 11% and pays interest annually.

1. Find the value of the bond if the required return is (1) 11%, (2) 15%, and

(3) 8%.

1. Plot your findings in part a on a set of “required return (x axis)–market value of

bond (y axis)” axes.

1. Use your findings in parts a and b 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.

1. What two possible reasons could cause the required return to differ from the

coupon interest rate?