Bond value and changing required returnsMidland Utilities has a bond issue outstanding that will mature...
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Bond value and changing required returnsMidland Utilities has a bond issue outstanding that will mature to its $1,000 par value in 15 years. The bond has a coupon interest rate of 12% and pays interest annually.
a.Find the value of the bond if the required return is (1) 12%, (2) 16%, and (3) 9%.
b.Use your finding in part a and the graph here, to discuss the relationship between the coupon interest rate on a bond and the required return and the market value of the bond relative to its par value.
c.What two possible reasons could cause the required return to differ from the coupon interest rate?
i 1,500 1,400- 1,300- 1,200- 1,100- 1,000- 900- 800 700 600 500+ 9 13 10 11 12 14 15 16 Required return (%) OK Bond Value ($) LO
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c.What two possible reasons could cause the required return to differ from the coupon interest rate?