Problem:
Bond valuation- An investor has two bonds in his portfolio that both have a face value of $1000 and pay a 10 percent annual coupon. Bond L matures in 15 years, while Bond S matures in 1 year.
a. What will the value of each of bond be if the going interest rate is 5 percent, 8 percent, and 12 percent? Assume that there is only one more interest payment to be made on Bond S, and its maturity, and 15 more payments on Bond L.
b. Why does the longer term bond's price vary more when interest rates change than does that of the shorter-term bond?