(Applying bond valuation relationships) (Related to Checkpoint 9.3 on page 302)

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.