Question 5: (15 points).
(Bond valuation relationships) Arizona Public Utilities issued a bond that pays $70 in interest, with a $1,000 par value and matures in 25 years. The markers required yield to maturity on a comparable-risk bond is 8 percent. (Round to the nearest cent.) For questions with two answer options (e.g. increase/decrease) choose the best answer and write it in the answer block. Question Answer
a. What is the value of the bond if the markers required yield to maturity on a comparable-risk bond is 8 percent? $
b. What is the value of the bond if the markers required yield to maturity on a comparable-risk bond increases to 11 percent? $
c. What is the value of the bond if the market's required yield to maturity on a comparable-risk bond decreases to 7 percent? $
d. The change in the value of a bond caused by changing interest rates is called interest-rate risk.
Based on the answer: in parts b and c, a decrease in interest rates (the yield to maturity) will cause the value of a bond to (increase/decrease): By contrast in interest rates will cause the value to (increase/decrease): 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 (par/face value): exceeds the bond's coupon rate, the bond will sell at a (discount/premium): and is less than the bond's coupon rate, the bond will sell at a (discount/premium): e. Assume the bond matures in 5 years instead of 25 years, what is the value of the bond if the yield to maturity on a comparable-risk bond is 8 percent? $ 960.07 Assume the bond matures in 5 years instead of 25 years, what is the value of the bond if the yield to maturity on a comparable-risk bond is 11 percent? $ f. Assume the bond matures in 5 years instead of 25 years, what is the value of the bond if the yield to maturity on a comparable-risk bond is 7 percent? $ g. From the findings in part e, we can conclude that a bondholder owning a long-term bond is exposed to (more/less) interest-rate risk than one owning a short-term bond.
Question 5: (15 points).
(Bond valuation relationships) Arizona Public Utilities issued a bond that pays $70 in interest, with a $1,000 par value and matures in 25 years. The markers required yield to maturity on a comparable-risk bond is 8 percent. (Round to the nearest cent.) For questions with two answer options (e.g. increase/decrease) choose the best answer and write it in the answer block. Question Answer
a. What is the value of the bond if the markers required yield to maturity on a comparable-risk bond is 8 percent? $
b. What is the value of the bond if the markers required yield to maturity on a comparable-risk bond increases to 11 percent? $
c. What is the value of the bond if the market's required yield to maturity on a comparable-risk bond decreases to 7 percent? $
d. The change in the value of a bond caused by changing interest rates is called interest-rate risk.
Based on the answer: in parts b and c, a decrease in interest rates (the yield to maturity) will cause the value of a bond to (increase/decrease): By contrast in interest rates will cause the value to (increase/decrease): 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 (par/face value): exceeds the bond's coupon rate, the bond will sell at a (discount/premium): and is less than the bond's coupon rate, the bond will sell at a (discount/premium): e. Assume the bond matures in 5 years instead of 25 years, what is the value of the bond if the yield to maturity on a comparable-risk bond is 8 percent? $ 960.07 Assume the bond matures in 5 years instead of 25 years, what is the value of the bond if the yield to maturity on a comparable-risk bond is 11 percent? $ f. Assume the bond matures in 5 years instead of 25 years, what is the value of the bond if the yield to maturity on a comparable-risk bond is 7 percent? $ g. From the findings in part e, we can conclude that a bondholder owning a long-term bond is exposed to (more/less) interest-rate risk than one owning a short-term bond.
