Arizona Public Utilities issued a bond that pays $60 in interest, with a $1,000 par value. It matures in 30 years. The market's required yield to maturity on a comparable-risk bond is 8 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 7 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 15 years instead of 30 years. Recompute your answers in parts a and b.
e. Explain the implications of your answers in part d as they relate to interest-rate risk, premium bonds, and discount bonds.