Garraty company-value of issued bonds


Problem:

The Garraty Company has two bond issues outstanding. Both bonds pay $100 annual interest plus $1,000 at maturity. Bond L has a maturity of 15 years, and Bond S a maturity of 1 year.

Q1. What will be the value of each of these bonds when the going rate of interest is (1) 5 percent, (2) 8 percent, and (3) 12 percent? Assume that there is only one more interest payment to be made on Bond S.

Q2. Why does the longer-term (15-year) bond fluctuate more when interest rates change than does the shorter-term bond (1-year)?

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Finance Basics: Garraty company-value of issued bonds
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