Question

?Bond relationship) ?Mason, Inc. has two bond issues outstanding, called Series A and Series? B, both paying the same annual interest of $85 Series A has a maturity of 12 years, whereas Series B has a maturity of 1 year.

a. What would be the value of each of these bonds when the going interest rate is (1) 5 percent, (2) 9 percent, and (3) 12 percent? Assume that there is only one more interest payment to be made on the Series B bonds.

b. Why does the longer-term (12-year) bond fluctuate more when interest rates change than does the? shorter-term (11-year) bond?

Answer 1

If going interest rate is 5%, than value of series A bond is
Value of Series A Bond = 85*8.863252 + 1000*0.556837
		1310.213
Value of Series B Bond = 85*0.952381 + 1000*0.952381
		1033.333
If going interest rate is 9%, than value of series A bond is
Value of Series A Bond = 85*7.160725 + 1000*0.355535
		964.1966
Value of Series B Bond = 85*0.917431 + 1000*0.917431
		995.4126
If going interest rate is 12%, than value of series A bond is
Value of Series A Bond = 85*6.194374 + 1000*0.256675
		783.1968
Value of Series B Bond = 85*0.892857 + 1000*0.892857
		968.7498

The longer term bond fluctuate more when interest rats chnage that is because long term bonds have more probability for change in interest rate that is increase in interest rate than the short term bonds.