(Bond valuation) You own a bond that pays $120 in annual interest, with a $1.000 par value. It matures in 20 years. Your required rate of retum is 11 percent. a. Calculate the value of the bond. b. How does the value change if your required rate of return (1) increases to 15 percent or (2) 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. Recompute your answers in part b. e. Explain the implications of your answers in part d as they relate to interest rate risk, premium bonds, and discount bonds.

(Bond valuation) You own a bond that pays $120 in annual interest, with a $1.000 par value. It matures in 20 years. Your required rate of retum is 11 percent. a. Calculate the value of the bond. b. How does the value change if your required rate of return (1) increases to 15 percent or (2) 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. Recompute your answers in part b. e. Explain the implications of your answers in part d as they relate to interest rate risk, premium bonds, and discount bonds.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter4: Bond Valuation

Section: Chapter Questions

Problem 5MC: What would be the value of the bond described in Part d if, just after it had been issued, the...

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