Question

A) An investor has two bonds in his portfolio that have a face value of $1,000 and pay a 6% annual coupon. Bond L matures in 19 years, while Bond S matures in 1 year. Assume that only one more interest payment is to be made on Bond S at its maturity and that 19 more payments are to be made on Bond L.

-What will the value of the Bond L be if the going interest rate is 6%? Round your answer to the nearest cent.

___________________$

-What will the value of the Bond S be if the going interest rate is 6%? Round your answer to the nearest cent.

________________$

-What will the value of the Bond L be if the going interest rate is 9%? Round your answer to the nearest cent.

______________$

-What will the value of the Bond S be if the going interest rate is 9%? Round your answer to the nearest cent.

_____________$

-What will the value of the Bond L be if the going interest rate is 12%? Round your answer to the nearest cent.

____________$

-What will the value of the Bond S be if the going interest rate is 12%? Round your answer to the nearest cent.

__________$

B) Why does the longer-term bond’s price vary more than the price of the shorter-term bond when interest rates change?

A) Long-term bonds have greater interest rate risk than do short-term bonds.

B) The change in price due to a change in the required rate of return decreases as a bond's maturity increases.

C) Long-term bonds have lower interest rate risk than do short-term bonds.

D) Long-term bonds have lower reinvestment rate risk than do short-term bonds.

E) The change in price due to a change in the required rate of return increases as a bond's maturity decreases.

Answer 1