The Garraty 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 1 year.
What will be the value of each of these bonds when the going rate of interest is (1) 5%, (2) 8% and (3) 12%? Assume that there is only one more interest payment to be made in bond S.
Why does the longer-term (15 years) bond fluctuate more when interest rates change than does the shorter-term bond (1) years?