PROBLEM:

Arizona Public Utilities issued a bond that pays $80 in interest, with a $1,000 par value. It matures in 30 years. The market's required yield to maturity on a comparable-risk bond is 6

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 12 percent or (ii) decreases to 5 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 30 years. Recompute your answers in parts a and b.

e.Explain the implications of your answers in part d as they relate to interest-rate risk, premium bonds, and discount bonds.

QUESTIONS:

a.What is the value of the bond if the market's required yield to maturity on a comparable-risk bond is 6 percent? ($) (Round to the nearest cent.)

b. (i) What is the value of the bond if the market's required yield to maturity on a comparable-risk bond increases to 12 percent? ($) (Round to the nearest cent.)

b. (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? ($) (Round to the nearest cent.)

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, not changed, decrease); by contrast, an increase in interest rates will cause the value to (increase, not changed, decrease). (Choose between the 3 options)

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); (Choose between the 3 options)

exceeds the bond's coupon rate, the bond will sell at (par, a discount, a premium); (Choose between the 3 options)

and is less than the bond's coupon rate, the bond will sell at (para, a discount ,a premium). (Choose between the 3 options)

d.Assume the bond matures in 5 years instead of 30 years, what is the value of the bond if the yield to maturity on a comparable-risk bond is 6 percent? ($) (Round to the nearest cent.)

Assume the bond matures in 5 years instead of 30 years, what is the value of the bond if the yield to maturity on a comparable-risk bond is 12 percent? ($) (Round to the nearest cent.)

Assume the bond matures in 5 years instead of 30 years, what is the value of the bond if the yield to maturity on a comparable-risk bond is 5 percent? ($) (Round to the nearest cent.)

e. From the findings in part d, we can conclude that a bondholder owning a long-term bond is exposed to (more, the same, less) more the same less interest-rate risk than one owning a short-term bond. (Choose between the 3 options)