Question

An investor has two bonds in his portfolio that have a face value of $1,000 and pay a 9% annual coupon. Bond L matures in 11 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 11 more payments are to be made on Bond L.

1. 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 11%? Round your answer to the nearest cent.
   $  
   
   What will the value of the Bond S be if the going interest rate is 11%? Round your answer to the nearest cent.
   $  
   
2. 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