An investor has two bonds in his portfolio that have a face value of $1,000 and pay a 9% annual coupon. Bond L matures in 12 years, while Bond S matures in 1 year. a. What will the value of the Bond L be if the going interest rate is 5%, 7%, and 10%? Assume that only one more interest payment is to be made on Bond S at its maturity and that 12 more payments are to be made on Bond L. Round your answers to the nearest cent. 5% 7% 10% Bond L $ $ Bond S $ 2$ $ b. Why does the longer-term bond's price vary more than the price of the shorter-term bond when interest rates change? I. Long-term bonds have lower interest rate risk than do short-term bonds. II. Long-term bonds have lower reinvestment rate risk than do short-term bonds. III. The change in price due to a change in the required rate of return increases as a bond's maturity decreases. IV. Long-term bonds have greater interest rate risk than do short-term bonds. V. The change in price due to a change in the required rate of return decreases as a bond's maturity increases.
An investor has two bonds in his portfolio that have a face value of $1,000 and pay a 9% annual coupon. Bond L matures in 12 years, while Bond S matures in 1 year. a. What will the value of the Bond L be if the going interest rate is 5%, 7%, and 10%? Assume that only one more interest payment is to be made on Bond S at its maturity and that 12 more payments are to be made on Bond L. Round your answers to the nearest cent. 5% 7% 10% Bond L $ $ Bond S $ 2$ $ b. Why does the longer-term bond's price vary more than the price of the shorter-term bond when interest rates change? I. Long-term bonds have lower interest rate risk than do short-term bonds. II. Long-term bonds have lower reinvestment rate risk than do short-term bonds. III. The change in price due to a change in the required rate of return increases as a bond's maturity decreases. IV. Long-term bonds have greater interest rate risk than do short-term bonds. V. The change in price due to a change in the required rate of return decreases as a bond's maturity increases.
Chapter8: Analysis Of Risk And Return
Section: Chapter Questions
Problem 9P
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Question
Transcribed Image Text:An investor has two bonds in his portfolio that have a face value of $1,000 and pay a 9% annual coupon. Bond L matures in 12 years, while Bond S matures in 1 year.
a. What will the value of the Bond L be if the going interest rate is 5%, 7%, and 10%? Assume that only one more interest payment is to be made on Bond S at its maturity and that 12
more payments are to be made on Bond L. Round your answers to the nearest cent.
5%
7%
10%
Bond L
$
$
Bond S
$
$
b. Why does the longer-term bond's price vary more than the price of the shorter-term bond when interest rates change?
I. Long-term bonds have lower interest rate risk than do short-term bonds.
II. Long-term bonds have lower reinvestment rate risk than do short-term bonds.
III. The change in price due to a change in the required rate of return increases as a bond's maturity decreases.
IV. Long-term bonds have greater interest rate risk than do short-term bonds.
V. The change in price due to a change in the required rate of return decreases as a bond's maturity increases.
-Select- ÷
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