Chapter 7, Problem 10SP

(Bond valuation) You own a bond that pays $70 in annual interest, with a $1,000 par value. It matures in 15 years. Your required rate of return is 7 percent.

1. a. Calculate the value of the bond.
2. b. How does the value change if your required rate of return (1) increases to 9 percent or (2) decreases to 5 percent?
3. c. Explain the implications of your answers in part (b) as they relate to interest rate risk, premium bonds, and discount bonds.
4. d. Assume that the bond matures in 5 years instead of 15 years. Recompute your answers in part (b).
5. e. Explain the implications of your answers in part (d) as they relate to interest rate risk, premium bonds, and discount bonds.