Question: 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 15 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 15 more payments are to be made on Bond L.
What will the value of the Bond L be if the going interest rate is 6%? Round your answer to the nearest cent.
$ _______?
What will the value of the Bond S be if the going interest rate is 6%? 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.
$ ________?
b. Why does the longer-term bond's price vary more than the price of the shorter-term bond when interest rates change? Choose one
a. The change in price due to a change in the required rate of return decreases as a bond's maturity increases.
b. Long-term bonds have lower interest rate risk than do short-term bonds.
c. Long-term bonds have lower reinvestment rate risk than do short-term bonds.
d. The change in price due to a change in the required rate of return increases as a bond's maturity decreases.
e. Long-term bonds have greater interest rate risk than do short-term bonds.