(Bond valuation relationships) A bond of Telink Corporation pays $110 in annual interest, with a $1,000 par value. The bonds mature in 20 years. The market's required yield to maturity on a comparable-risk bond is 10 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 (1) increases to 14 percent or (ii) decreases to 8 percent? c. Interpret your findings 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 10 percent? $ (Round to the nearest cent.) b. (1) What is the value of the bond if the market's required yield to maturity on a comparable risk bond increases to 14 percent? $ (Round to the nearest cent.) b. (i) What is the value of the bond if the market's required yield to maturity on a comparable risk bond decreases to 6 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 (Select from the drop-down menus.) 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 exceeds the bond's coupon rate, the bond will sell at is less than the bond's coupon rate, the bond will sell at and (Select from the drop-down menus.) par a discount a premium by contrast, an increase in interest rates will cause the value to
(Bond valuation relationships) A bond of Telink Corporation pays $110 in annual interest, with a $1,000 par value. The bonds mature in 20 years. The market's required yield to maturity on a comparable-risk bond is 10 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 (1) increases to 14 percent or (ii) decreases to 8 percent? c. Interpret your findings 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 10 percent? $ (Round to the nearest cent.) b. (1) What is the value of the bond if the market's required yield to maturity on a comparable risk bond increases to 14 percent? $ (Round to the nearest cent.) b. (i) What is the value of the bond if the market's required yield to maturity on a comparable risk bond decreases to 6 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 (Select from the drop-down menus.) 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 exceeds the bond's coupon rate, the bond will sell at is less than the bond's coupon rate, the bond will sell at and (Select from the drop-down menus.) par a discount a premium by contrast, an increase in interest rates will cause the value to
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:(Bond valuation relationships) A bond of Telink Corporation pays $110 in annual interest, with a $1,000 par value. The bonds mature in 20 years. The market's required yield to maturity on a comparable-risk bond is 10 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 (1) increases to 14 percent or (ii) decreases to 8 percent?
c. Interpret your findings 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 10 percent?
$ (Round to the nearest cent.)
b. (1) What is the value of the bond if the market's required yield to maturity on a comparable risk bond increases to 14 percent?
$ (Round to the nearest cent.)
b. (i) What is the value of the bond if the market's required yield to maturity on a comparable risk bond decreases to 6 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
(Select from the drop-down menus.)
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
exceeds the bond's coupon rate, the bond will sell at
is less than the bond's coupon rate, the bond will sell at
and
(Select from the drop-down menus.)
par
a discount
a premium
by contrast, an increase in interest rates will cause the value to
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