Price of the shorter-term bond when interest rates change

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Reference no: EM131596054

An investor has two bonds in his portfolio that both have a face value of $1,000 and pay a 9% annual coupon. Bond L matures in 12 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 12 more payments are to be made on Bond L.

a) 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 10%? Round your answer to the nearest cent.

What will the value of the Bond S be if the going interest rate is 10%? 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.

b) Why does the longer-term bond’s price vary more than the price of the shorter-term bond when interest rates change?

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

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

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

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

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

Reference no: EM131596054

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