In: Finance
Arizona Public Utilities issued a bond that pays $80 in interest, with a $1,000 par value. It matures in 20 years. The market's required yield to maturity on a comparable-risk bond is 6 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 5 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 15 years instead of 20 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.