Question

Arizona Public Utilities issued a bond that pays ​$70 in​ interest, with a ​$1,000 par value. It matures in 25 years. The​ market's required yield to maturity on a​ comparable-risk bond is 8 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 10 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 5 years instead of 25 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.

Answer 1