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Midland Utilities has a bond issue outstanding that will mature to its $1000 par value in 12 years. The bond has a
Midland Utilities has a bond issue outstanding that will mature to its $1000 par value in 12 years. The bond has a
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coupon rate of 11% and pays interest annually.
a. Find the value of the bond if the required return is (1) 11%, (2) 15%, and (3) 8%
b. Plot your findings in part a on a set of required return (x-axis)-market value of bond (y-axis)” axes.
c. Use your findings in parts a and b to discuss the relationship between the coupon rate on a bond and the required return and the market value of the bond relative to its par value
d. What two possible reasons could cause the required return to differ from the coupon rate?
