Problem: An investor has 2 bonds in his portfolio that have a face value of $1000 and pay a 10% annual coupon. Bond L matures in 15 years, while Bond S matures in 1 year.
1) What will the value of each bond be if the going interest rate is 5%, 8%, 12%? 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.
2) Why does the longer-term bond's price vary more than the price of the shorter-term bond when interest rates change?