9-3 Bond Valuation Problem 9-6 Bond valuation An investor has two bonds in his p

Question

9-3 Bond Valuation Problem 9-6 Bond valuation An investor has two bonds in his portfolio that both have a face value of $1,000 and pay a 11% annual coupon. Bond L matures in 19 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 19 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 6%? Round your answer to the nearest cent. What will the value of the Bond S be if the going interest rate is 6%? Round your answer to the nearest cent. What will the valueof 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? I. The change in price due to a change in the required rate of return decreases as a bond's maturity increases. · Long-term bonds have lower interest rate risk then do short-term bonds. III. Long-term bonds have lower reinvestment rate risk then do short-term bonds. IV. The change in price due to a change in the required rate of return increases as a bond's maturity decreases V. Long-term bonds have greater interest rate risk then do short-term bonds. Select-

Explanation / Answer

1. 110/1.06+....110/1.06^19+1000/1.06^19=1557.906

2. 1110/1.06=1047.17

3. 110/1.10+....110/1.10^19+1000/1.10^19=1083.649

4. 1110/1.10=1009.091

5. 110/1.12+....110/1.12^19+1000/1.12^19=926.3422

6. 1110/1.12=991.0714

7. Long term bonds have higher duration and hence higher interest rate risk due to which their price varies more than short term bonds

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