(Bond Valuation) Crawford Inc. has two bond issues outstanding, both paying the
ID: 2779400 • Letter: #
Question
(Bond Valuation) Crawford Inc. has two bond issues outstanding, both paying the same annual interest of $85, called Series A and Series B. 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 percent, and (3) 12 percent? Assume 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 deos the shorter-term (1-year) bond?
Explanation / Answer
A.series a 1. 1320.10 ; 2. 1307.68; 3.783.19
Series b 1. 1033.34 ; 2. 1004.63 ; 3. 968.75.
B.long term bond, longer the maturity more the risk , closer its to maturity less the risk.The longer msturity are more sensitive to interest rate fluctuations as there is more speculation .closer the bond is to maturity the price will tend towards face value.
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