Question

eBook Problem Walk-Through

An investor has two bonds in his portfolio that have a face value of $1,000 and pay a 10% annual coupon. Bond L matures in 12 years, while Bond S matures in 1 year.

1. What will the value of the Bond L be if the going interest rate is 6%, 7%, and 11%? 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. Round your answers to the nearest cent.

   	6%	7%	11%
   Bond L	$	$	$
   Bond S	$	$	$

2. Why does the longer-term bond’s price vary more than the price of the shorter-term bond when interest rates change?
   1. The change in price due to a change in the required rate of return increases as a bond's maturity decreases.
   2. Long-term bonds have greater interest rate risk than do short-term bonds.
   3. The change in price due to a change in the required rate of return decreases as a bond's maturity increases.
   4. Long-term bonds have lower interest rate risk than do short-term bonds.
   5. Long-term bonds have lower reinvestment rate risk than do short-term bonds.

   -Select-IIIIIIIVV

Answer 1