In: Finance
(Bond valuation relationships) You own a bond that pays $ 110 in annual interest, with a $1,000 par value. It matures in 10 years. The market's required yield to maturity on a comparable-risk bond is 10 percent.
a. What is the value of the bond if the market's required yield to maturity on a comparable-risk bond is 10 percent?
(Round to the nearest cent.)
b. (i) What is the value of the bond if the yield to maturity on a comparable-risk bond increases to 14 percent?
(Round to the nearest cent.)
b. (ii) What is the value of the bond if the yield to maturity on a comparable-risk bond decreases to 8 percent?
(Round to the nearest cent.)
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: (increase, be unchanged, or decrease)?
By contrast, an increase in interest rates will cause the value to: (increase, be unchanged, or decrease)?