Arizona Public Utilities issued a bond that pays $70 in interest
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.
|a. What is the value of the bond if the markers required yield to maturity on a comparable-risk bond is 8 percent?||$893.25|
|b. What is the value of the bond if the markers required yield to maturity on a comparable-risk bond increases to 11 percent?||$663.13|
|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):|
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