Bond valuation and interest rate risk

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Bond Valuation and Interest Rate Risk

The Garraty Company has two bonds issues outstanding. Both bonds pay $100 annual interest plus $1,000.00 at maturity. Bond I. has a maturity of 15 years, and Bond S has a maturity of 1 year.

What will be the value of each of these bonds when the going rate of interest is (1) 5 %,( 2) 8% and (3) 12%. Assume that there is only one more interest payment to be made on Bonds S.

Why does the longer term (15 year) bond fluctuate more when interest rates change than does the shorter-term bond (1 year)?

Reference no: EM13783223

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