New Generation Public Utilities issued a bond with a $ 1,000 par value that pays $ 30 in annual interest. It matures in 20 years. Your required rate of return is 4 percent.
a. Calculate the value of the bond.
b. How does the value change if your required rate of return (1) increases to 7 percent or (2) decreases to 2 percent?
c. Explain the implications of your answers in part (b) as they relate to interest rate risk, premium bonds, and discount bonds.
d. Assume that the bond matures in 10 years instead of 20 years. Recompute your answers in part (b).
e. Explain the implications of your answers in part (d) as they relate to interest rate risk, premium bonds, and discount bonds.