Bond valuation relationships

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Reference no: EM133629942

Question

(Bond valuation relationships) Arizona Public Utilities issued a bond that pays $60 in interest, with a $1,000 par value. It matures in 25 years. The market's required yield to maturity on a comparable-risk bond is 7 percent.

1. Calculate the value of the bond.

2. How does the value change if the market's required yield to maturity on a comparable-risk bond (i) increases to 12 percent or (ii) decreases to 6 percent?

3. Explain the implications of your answers in part b as they relate to interest-rate risk, premium bonds, and discount bonds.

4. Assume that the bond matures in 5 years instead of 25 years. Recompute your answers in parts a and b.

5. Explain the implications of your answers in part d as they relate to interest-rate risk, premium bonds, and discount bonds.

Reference no: EM133629942

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