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eBook An investor has two bonds in his portfolio that have a face value of $1,000...

eBook

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 13 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 13 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 4%? Round your answer to the nearest cent.
    $  

    What will the value of the Bond S be if the going interest rate is 4%? Round your answer to the nearest cent.
    $  

    What will the value of the Bond L be if the going interest rate is 8%? Round your answer to the nearest cent.
    $  

    What will the value of the Bond S be if the going interest rate is 8%? 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 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

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