(Bond valuation relationships)A bond of Telink Corporation pays

$110

in annual interest, with a

$1,000

par value. The bonds mature in

20

years. The market's required yield to maturity on a comparable-risk bond is

10

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

13

percent or (ii) decreases to

6

percent?

c.Interpret your findings in parts a and

b.

Question content area bottom

Part 1

a.What is the value of the bond if the market's required yield to maturity on a comparable-risk bond is

10

percent?

$enter your response here

(Round to the nearest cent.)

Part 2

b. (i)What is the value of the bond if the market's required yield to maturity on a comparable risk bond increases to

13

percent?

$enter your response here

(Round to the nearest cent.)

Part 3

b. (ii)What is the value of the bond if the market's required yield to maturity on a comparable risk bond decreases to

6

percent?

$enter your response here

(Round to the nearest cent.)

Part 4

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

increase

be unchanged

decrease

;

by contrast, an increase in interest rates will cause the value to

increase

be unchanged

decrease

.

(Select from the drop-down menus.)

Part 5

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

par

a discount

a premium

;

exceeds the bond's coupon rate, the bond will sell at

par

a discount

a premium

;

and

is less than the bond's coupon rate, the bond will sell at

par

a discount

a premium

.

(Select from the drop-down menus.)