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There is a bond that pays $100 per year interest, with a $1,000 par value. It matures in 15 years. The market required yield to
There is a bond that pays $100 per year interest, with a $1,000 par value. It matures in 15 years. The market required yield to maturity on a comparable bond is 12%.
- What is the value of the bond?
- How does the value change if the yield to maturity on a comparable bond increase to 15%? What if it decreases to 8%.
- Explain the above questions (part b) with the concepts of interest rate risk, premium bonds and discount bonds.
- Recalculate the answer in b, with the assumption that the bond matures in 5 years (instead of 15 years).
- Explain the above questions (part d) with the concepts of interest rate risk, premium bonds and discount bonds.
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