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An investor has two bonds in his portfolio that have a face value of $1,000 and...

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

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Expert Solution

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

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