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?

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

Answer 1