An investor has two bonds in his portfolio that both have a face value of $1,000 and pay a 9% annual coupon. Bond L matures in 12 years, while Bond S matures in 1 year.
Assume that only one more interest payment is to be made on Bond S at its maturity and that 12 more payments are to be made on Bond L.
a) What will the value of the Bond L be if the going interest rate is 4%? Round your answer to the nearest cent.
What will the value of the Bond S be if the going interest rate is 4%? Round your answer to the nearest cent.
What will the value of the Bond L be if the going interest rate is 10%? Round your answer to the nearest cent.
What will the value of the Bond S be if the going interest rate is 10%? Round your answer to the nearest cent.
What will the value of the Bond L be if the going interest rate is 12%? Round your answer to the nearest cent.
What will the value of the Bond S be if the going interest rate is 12%? Round your answer to the nearest cent.
b) Why does the longer-term bond’s price vary more than the price of the shorter-term bond when interest rates change?
1-The change in price due to a change in the required rate of return increases as a bond's maturity decreases.
2-Long-term bonds have greater interest rate risk than do short-term bonds.
3-The change in price due to a change in the required rate of return decreases as a bond's maturity increases.
4-Long-term bonds have lower interest rate risk than do short-term bonds.
5-Long-term bonds have lower reinvestment rate risk than do short-term bonds.