Crawford Inc. has two bond issues outstanding, both paying the same annual interest of $55, called Series A and Series B. Series A has a maturity of 12 years, whereas Series B has a maturity of 1 year.
a. What would the value of each of these bond when the going interest rate is (1) 4 percent, (2) 7 percent, and (3) 10 percent? Assume that there is only one more interest payment to be mad on the Series b bonds.
b. Why does the longer-term (12-year) bond fluctuate more when interest rates change than does the shorter-term (1-year) bond?