Arizona Public Utilities issued a bond that pays $80 in interest, with a $1,000 par value. It matures in 20 years. The market’s required yield to maturity on a comparable risk bond is 7 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 (i) increases to 10 percent or (ii) decreases to 6 percent?
c. Explain the implications of your answers in part (b) as they relate to interest rate risk, premium bonds, and discount bonds.
d. Assume that the bond matures in 10 years instead of 20 years. Recompute your answers in part (b).
e. Explain the implications of your answers in part (d) as they relate to interest rate risk, premium bonds, and discount bonds.