Question

(Bond

relationship​)

​Mason, Inc. has two bond issues​ outstanding, called Series A and Series​ B, both paying the same annual interest of

​$110110.

Series A has a maturity of

1212

​years, whereas Series B has a maturity of

11

year.

a. What would be the value of each of these bonds when the going interest rate is​ (1)

44

​percent, (2)

99

​percent, and​ (3)

1313

​percent? Assume that there is only one more interest payment to be made on the Series B bonds.

b. Why does the​ longer-term

​(1212​-year)

bond fluctuate more when interest rates change than does the​ shorter-term

​(11​-year)

​bond?

Answer 1

		Series A	Series B
When Rate=4%	Value of bond	$1,656.96	$1,067.31
When Rate=9%	Value of bond	$1,143.21	$1,018.35
When Rate=13%	Value of bond	$881.65	$982.30

The longer term bond fluctuates more due to higher interest rate risk on the security. The investors are more prone to changes in interest rates in the longer duration than in the short term.

WORKINGS