Price of shorter-term bond when interest rates change

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Reference no: EM131549135

1. An investor has two bonds in his portfolio that both have a face value of $1,000 and pay a 8% annual coupon. Bond L matures in 17 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 17 more payments are to be made on Bond L. What will the value of the Bond L be if the going interest rate is 5%? Round your answer to the nearest cent.

$ What will the value of the Bond S be if the going interest rate is 5%? Round your answer to the nearest cent.

$ What will the value of the Bond L be if the going interest rate is 9%? Round your answer to the nearest cent.

$ What will the value of the Bond S be if the going interest rate is 9%? Round your answer to the nearest cent.

$ What will the value of the Bond L be if the going interest rate is 12%? Round your answer to the nearest cent.

$ What will the value of the Bond S be if the going interest rate is 12%? 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?

a. The change in price due to a change in the required rate of return increases as a bond's maturity decreases.

b. Long-term bonds have greater interest rate risk than do short-term bonds.

c. The change in price due to a change in the required rate of return decreases as a bond's maturity increases.

d. Long-term bonds have lower interest rate risk than do short-term bonds.

e. Long-term bonds have lower reinvestment rate risk than do short-term bonds.

Reference no: EM131549135

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