Question: The Allison 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 has a maturity of one year. Interest is paid annually.
Q1. What will be the value of each of these bonds when the going rate of interest is (1) 5 percent, (2) 7 percent, and (3) 11 percent? Assume 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)?