Question
A bond of Visador Corporation pays $80 in annual interest, with a $1,000 par value. The bonds mature in 18 years. The market's required yield
A bond of Visador Corporation pays $80 in annual interest, with a $1,000 par value. The bonds mature in 18 years. The market's required yield to maturity on a comparable-risk bond is 8.5 percent.
a.Calculate the value of the bond.
b.How does the value change if the market's required yield to maturity on a comparable-risk bond (i) increases to 11percent or (ii) decreases to 5 percent?
c.Interpret your finding in parts a and b.
a. What is the value of the bond if the market's required yield to maturity on a comparable-risk bond is 8.5 percent?
b. (i). What is the value of the bond if the market's required yield to maturity on a comparable-risk bond increases to 11 percent?
(ii). What is the value of the bond if the market's required yield to maturity on a comparable-risk bond decreases to 5 percent?
c. The change in the value of a bond caused by changing interest rates is called interest-rate risk. Based on the answers in part b, a decrease in interest rates (the yield to maturity) will cause the value of a bond to _____; by contrast, an increase in interest rates will cause the value to____. (options for blanks are: increased, be unchanged, or decreases).
Also, based on the answers in part b,if the yield to maturity (current interest rate):
equals the coupon interest rate, the bond will sell at ____ (blank option: par, a discount, a premium);
exceeds the bond's coupon rate, the bond will sell at _____ (blank option: par, a discount, a premium); and
is less than the bond's coupon rate, the bond will sell at____ (blank option: par, a discount, a premium).
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