Question

An investor has two bonds in his portfolio that have a face value of $1,000 and pay a 10% annual coupon. Bond L matures in 17 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 17 more payments are to be made on Bond L. (Please do calculations with excel formulas)

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 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 11%? Round your answer to the nearest cent. $ What will the value of the Bond S be if the going interest rate is 11%? 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? The change in price due to a change in the required rate of return increases as a bond's maturity decreases. 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.

Answer 1

Bonds price has been calculated in the attached excel screen shot.

Rates	Bond L	Bond S
5%	$1,563.70	$1,047.62
10%	$1,000.00	$1,000.00
11%	$924.51	$990.99

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.