Question

An investor has two bonds in his portfolio that have a face value of $1,000 and pay an 11% annual coupon. Bond L matures in 20 years, while Bond S matures in 1 year.

1. What will the value of the Bond L be if the going interest rate is 7%, 9%, and 12%? 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%	9%	12%
   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. Long-term bonds have greater interest rate risk than do short-term bonds.
   2. The change in price due to a change in the required rate of return decreases as a bond's maturity increases.
   3. Long-term bonds have lower interest rate risk than do short-term bonds.
   4. Long-term bonds have lower reinvestment rate risk than do short-term bonds.
   5. The change in price due to a change in the required rate of return increases as a bond's maturity decreases.

   -Select-IIIIIIIVVItem 7

Answer 1