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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