You own a bond that pays

$100

in annual interest, with a

$1,000

par value. It matures in

20

years. Your required rate of return is

12

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

7

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

20

years. Recompute your answers in part

(b).

e. Explain the implications of your answers in part

(d)

as they relate to interest rate risk, premium bonds, and discount bonds.