Question

A bond of Visador Corporation pays $80 in annual interest, with a $1,000 par value. The bonds mature in 18 years. The market's required yield to maturity on a comparable-risk bond is 8.5 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 11percent or (ii) decreases to 5 percent?

c. Interpret your finding in parts a and b.

a. What is the value of the bond if the market's required yield to maturity on a comparable-risk bond is 8.5 percent?

b. (i). What is the value of the bond if the market's required yield to maturity on a comparable-risk bond increases to 11 percent?

(ii). What is the value of the bond if the market's required yield to maturity on a comparable-risk bond decreases to 5 percent?

c. The change in the value of a bond caused by changing interest rates is called interest-rate risk. Based on the answers in part b, a decrease in interest rates (the yield to maturity) will cause the value of a bond to _____; by contrast, an increase in interest rates will cause the value to____. (options for blanks are: increased, be unchanged, or decreases).

Also, based on the answers in part b,if the yield to maturity (current interest rate):

equals the coupon interest rate, the bond will sell at ____ (blank option: par, a discount, a premium);

exceeds the bond's coupon rate, the bond will sell at _____ (blank option: par, a discount, a premium); and

is less than the bond's coupon rate, the bond will sell at____ (blank option: par, a discount, a premium).

Answer #1

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