You own a bond that pays RM500 in annual interest, with a RM5000 par value. It matures in 20 years. Your required rate of return is 15 percent.
a) Calculate the value of the bond.
b) How does the value change of your required rate of return increases to 18 percent or decrease to 8 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 the bond matures in 10 years instead of 20 years. Re-compute your answer in part b.