Question

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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 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 5%? Round your answer to the nearest cent.
   $  
   
   What will the value of the Bond S be if the going interest rate is 5%? Round your answer to the nearest cent.
   $  
   
   What will the value of the Bond L be if the going interest rate is 10%? Round your answer to the nearest cent.
   $  
   
   What will the value of the Bond S be if the going interest rate is 10%? Round your answer to the nearest cent.
   $  
   
   What will the value of the Bond L be if the going interest rate is 14%? Round your answer to the nearest cent.
   $  
   
   What will the value of the Bond S be if the going interest rate is 14%? 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 reinvestment rate risk than do short-term bonds.
   2. The change in price due to a change in the required rate of return increases as a bond's maturity decreases.
   3. Long-term bonds have greater interest rate risk than do short-term bonds.
   4. The change in price due to a change in the required rate of return decreases as a bond's maturity increases.
   5. Long-term bonds have lower interest rate risk than do short-term bonds.
   
   -Select-IIIIIIIVVItem 7

Answer 1