An investor has two bonds in his portfolio that both have a face value of $1,000
ID: 2730916 • Letter: A
Question
An investor has two bonds in his portfolio that both have a face value of $1,000 and pay a 12% 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.
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 13%? Round your answer to the nearest cent.
$
What will the value of the Bond S be if the going interest rate is 13%? Round your answer to the nearest cent.
$
Why does the longer-term bond’s price vary more than the price of the shorter-term bond when interest rates change?
a. The change in price due to a change in the required rate of return decreases as a bond's maturity increases.
b. Long-term bonds have lower interest rate risk then do short-term bonds.
c. Long-term bonds have lower reinvestment rate risk then do short-term bonds.
d. The change in price due to a change in the required rate of return increases as a bond's maturity decreases.
e. Long-term bonds have greater interest rate risk then do short-term bonds.
Explanation / Answer
Answer 1.
Value of Bond L = 120/1.04 + 120/1.04^2 + ... + 120/1.04^12 + 1000/1.04^12
= $1,750.81
Answer 2.
Value of Bond S = 120/1.04 + 1000/1.04
= $1,076.92
Answer 3.
Value of Bond L = 120/1.10 + 120/1.10^2 + ... + 120/1.10^12 + 1000/1.10^12
= $1,136.27
Answer 4.
Value of Bond S = 120/1.10 + 1000/1.10
= $1,018.18
Answer 1.
Value of Bond L = 120/1.04 + 120/1.04^2 + ... + 120/1.04^12 + 1000/1.04^12
= $1,750.81
Answer 2.
Value of Bond S = 120/1.04 + 1000/1.04
= $1,076.92
Answer 5.
Value of Bond L = 120/1.13 + 120/1.13^2 + ... + 120/1.13^12 + 1000/1.13^12
= $940.82
Answer 6.
Value of Bond S = 120/1.13 + 1000/1.13
= $991.15
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