you own a bond that pays $100 in annual interest, with a $1,000 par value. it ma

Question

you own a bond that pays $100 in annual interest, with a $1,000 par value. it matures in 15 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) increase to 15 percent or (2) decrease to 8 percent? c. explain the implications of your answer in part b as they relate to the interest rate risk, premium bonds, and discount bonds. d. assume that the bond matures in 5 years instead of 15 years. recompute your answers in part b. explain the implications of your answers in part d as they relate to the interest rate risk , premuim bonds, and discount bonds.

Explanation / Answer

you own a bond that pays $100 in annual interest, with a $1,000 par value. it matures in 15 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) increase to 15 percent or (2) decrease to 8 percent?

$863.78;

(a) $707.63;

(b) $1,171.19

  

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