7-10. (Bond valuation) You own a bond that pays $70 in annual interest, with a $1,000 par value. It matures in 15 years. Your required rate of return is 7 percent.

a. Calculate the value of the bond.

b. How does the value change if your required rate of return (1) increases to 9 percent or (2) decreases to 5 percent?

c. Explain the implications of your answers in part (b) as they relate to interest rate risk, pre- mium bonds, and discount bonds.

d. Assume that the bond matures in 5 years instead of 15 years.

Recompute your answers in part (b). e. Explain the implications of your answers in part (d) as they relate to interest rate risk, pre- mium bonds, and discount bonds.