Question

You own a bond that pays $100 in annual interest, with a $1,000 par value. It matures in 15 years. The market’s required yield to maturity on a comparable-risk bond is 12 percent.
a. Calculate the value of the bond.
b. How does the value change if the yield to maturity on a comparable-risk bond (i) increases to 15 percent or (ii) decreases to 8 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 5 years instead of 15 years and recalculate 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.



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  • CreatedOctober 31, 2014
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