Bond value and time: Constant

Bond value and time: Constant required returns Zona Estates has just issued a 12-year, 10% coupon rate, €1,000-par bond that pays interest annually. The required return is currently 12%, and the company is certain it will remain at 12% until the bond matures in 12 years.

a. Assuming that the required return does remain at 12% until maturity, find the value of the bond with (1) 12 years, (2) 10 years, (3) 8 years, (4) 5 years, and (5) 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 6.6.

 c. Using your graph in part c, explain the relationship between the market value of the bond and the time to maturity when the coupon rate and the expected rates are constant throughout the period.

Bond value and time: Constant required returns Zona Estates has just issued a 12-year, 10% coupon...

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