Question

An investor has two bonds in his portfolio that have a face value of $1,000 and pay a 12% annual coupon. Bond L matures in 20 years, while Bond S matures in 1 year.

A. What will the value of the Bond L be if the going interest rate is 7%, 8%, and 13%? Assume that only one more interest payment is to be made on Bond S at its maturity and that 20 more payments are to be made on Bond L. Round your answers to the nearest cent.

7% | 8% | 13% | |

Bond L | $ | $ | $ |

Bond S | $ | $ | $ |

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

- Long-term bonds have lower interest rate risk than do short-term bonds.
- Long-term bonds have lower reinvestment rate risk than do short-term bonds.
- The change in price due to a change in the required rate of return increases as a bond's maturity decreases.
- Long-term bonds have greater interest rate risk than do short-term bonds.
- The change in price due to a change in the required rate of return decreases as a bond's maturity increases.

Answer #1

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value of $1,000 and pay a 10% annual coupon. Bond L matures in 12
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What will the value of the Bond L be if the going interest rate
is 5%, 6%, and 11%? Assume that only one more interest payment is
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Assume that only one more interest payment is to be made on Bond
S at its maturity and that 10 more payments are to be made on Bond
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value of $1,000 and pay a 9% annual coupon. Bond L matures in 13
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Assume that only one more interest payment is to be made on Bond
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eBook Problem Walk-Through
An investor has two bonds in his portfolio that have a face
value of $1,000 and pay a 12% annual coupon. Bond L matures in 12
years, while Bond S matures in 1 year.
What will the value of the Bond L be if the going interest rate
is 7%, 9%, and 13%? Assume that only one more interest payment is
to be made on Bond S at its maturity and that 12 more payments are
to...

An investor has two bonds in his portfolio that have a face
value of $1,000 and pay a 7% annual coupon. Bond L matures in 12
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 12 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...

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value of $1,000 and pay a 6% annual coupon. Bond L matures in 15
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 15 more payments are to be made on Bond
L.
What will the value of the Bond L be if the going interest rate
is 4%? Round...

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