Question
You own a bond that pays $100 in annual interest, with a $1,000 par value. It matures in 20 years. The market's required yield to
You own a bond that pays $100 in annual interest, with a $1,000 par value. It matures in 20 years. The market's required yield to maturity on a comparable-risk bond is 11 percent.
a.Calculate the value of the bond.
b.How does the value change if the yield to maturity on a comparable-risk bond (i) increases to 16 percent or (ii) 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 4 years instead of 20 years and recalculate 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.
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