Question
You own a bond that pays $100 100 in annualinterest, with a $1000 1,000 par value. It matures in 20 years. Your required rate of
You own a bond that pays $100
100 in annualinterest, with a $1000
1,000 par value. It matures in 20 years. Your required rate of return is 11 percent.
a. Calculate the value of the bond.
b. How does the value change if your required rate of return(1) increases to 15 percent or(2) decreases to 8 percent?
c. Explain the implications of your answers in part (b) as they relate to interest raterisk, premiumbonds, and discount bonds.
d. Assume that the bond matures in 4 years instead of 20 years. Recompute your answers in part (b).
e. Explain the implications of your answers in part (d) as they relate to interest raterisk, premiumbonds, and discount bonds.
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