Question

An investor has two bonds in his portfolio that have a face value of $1,000 and pay a 12% 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. 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. $ Why does the longer-term bond’s price vary more than the price of the shorter-term bond when interest rates change? Long-term bonds have greater interest rate risk than do short-term bonds. 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 than do short-term bonds. Long-term bonds have lower reinvestment rate risk than do short-term bonds. The change in price due to a change in the required rate of return increases as a bond's maturity decreases. Grade It Now Save and Continue Continue without saving

Answer 1

CASE 1	Interest rate	5%		Face valuee	1000	cupon rate	12%
				Payment for each year	120
BOND L
	Years	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16	17	18	19
	Payments	120	120	120	120	120	120	120	120	120	120	120	120	120	120	120	120	120	120	1120	Bond value	sum of discounted payments
	Discount all the payments with 5%interest rate	114.29	108.84	103.66	98.72	94.02	89.55	85.28	81.22	77.35	73.67	70.16	66.82	63.64	60.61	57.72	54.97	52.36	49.86	443.22	1845.97
CASE 2
BOND L
	Years	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16	17	18	19
	Payments	120	120	120	120	120	120	120	120	120	120	120	120	120	120	120	120	120	120	1120	Bond value
	Discount all the payments with 9%interest rate	110.09	101.00	92.66	85.01	77.99	71.55	65.64	60.22	55.25	50.69	46.50	42.66	39.14	35.91	32.94	30.22	27.73	25.44	217.83	1268.50
CASE 3
Bond L
	Years	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16	17	18	19
	Payments	120	120	120	120	120	120	120	120	120	120	120	120	120	120	120	120	120	120	1120	Bond value
	Discount all the payments with 12%interest rate	107.14	95.66	85.41	76.26	68.09	60.80	54.28	48.47	43.27	38.64	34.50	30.80	27.50	24.55	21.92	19.57	17.48	15.60	130.04	1000.00
CASE 1				CASE 2			CASE 3
BOND S				BOND S			BOND S
	Years	1		Years	1		Years	1
	Payments	1120		Payments	1120		Payments	1120
	Discount all the payments with 5%interest rate	1066.667		Discount all the payments with 9%interest rate	1027.523		Discount all the payments with 12%interest rate	1000
	Bond value	1066.667		Bond Value	1027.523		Bond Value	1000