919 Applying bond valuation relationships Arizona Public Uti

9-19. (Applying bond valuation relationships) 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 re- quired 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 compa- c. Explain the implications of your answers in part b as they relate to interest-rate d. Assume that the bond matures in 10 years instead of 20 years. Recompute your e. Explain the implications of your answers in part d as they relate to interest-rate rable-risk bond (i) increases to 10 percent or (ii) decreases to 6 percent? risk, premium bonds, and discount bonds. answers in part b risk, premium bonds, and discount bonds.

Solution

As per policy only first four questions will be answered

Part A

Value of bond = (C*(((1-(1+r)^-n))/r))+(F/((1+r)^n)) = (80*(1-((1.07^-20)/0.07))+(1000/(1.07^20)) = 1105.94

Part B

In case of 10%

Value of bond = (80*((1-(1.10^-20)/0.10))+(1000/(1.10^20))=829.73

In case of 6%

Value of bond = (80*((1-(1.06^-20))/0.06))+(1000/(1.06^20))=1229.40

Part C

When interest rate (yield to maturity) is lower than the coupon rate, it is said the bonds are issued at premium

But when interest rate (yield to maturity) is higher than the coupon rate, it is said the bonds are issued at discount

Part D

In case of 10% with 10 years maturity period

Value of bond = (80*((1-(1.10^-10))/0.10))+(1000/(1.10^10)) =877.11

In case of 6% with 10 years maturity period

Value of bond = (80*((1-(1.06^-10))/0.06)))+(1000/(1.06^10)) = 1147.20