Mason, Inc. has two bond issues outstanding, called Series A and Series B, both paying the same annual interest of $105. Series A has a maturity of 12 years, whereas Series B has a maturity of 1 year.
a. What would be the value of each of these bonds when the going interest rate is (1) 5 percent, (2) 8 perecent, (3) 14 percent? Assume that there is only one more interest payment to be made 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?