BOND VALUATION An investor has two bonds in his portfolio that have a face value

Question

BOND VALUATION An investor has two bonds in his portfolio that have a face value of $1,000 and pay a 11% annual coupon, Bond L matures in 20 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 20 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 5%? Round your answer to the nearest cent. What will the value of the Bond S be if the going interest rate is 5%? Round your answer to the nearest cent. what will the value of the Bond L be if the going interest rate is 9%? Round your answer to the nearest cent. What will the value of the Bond S be if the going interest rate is 9%? 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? I. Long-term bonds have greater interest rate risk than do short-term bonds. II. The change in price due to a change in the required rate of return decreases as a bond's maturity increases III. Long-term bonds have lower interest rate risk than do short-term bonds. IV. Long-term bonds have lower reinvestment rate risk than do short-term bonds. V. The change in price due to a change in the required rate of return increases as a bond's maturity decreases.

Explanation / Answer

Option I is correct because long term bonds have more discounting periods

Rate L S 5% $      1,747.73 $     1,057.14 9% $      1,182.57 $     1,018.35 12% $         925.31 $        991.07

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