BOND VALUATION An investor has two bonds in his portfolio that have a face value of $1,000 and pay an 11% annual coupon. Bond L matures in 12 years, while Bond S matures in 1 year. a. What will the value of each bond be if the going interest rate is 6%, 8%, and 12%? 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. b. Why does the longer-term bond’s price vary more than the price of the shorter-term bond when interest rates change?

Question

BOND VALUATION An investor has two bonds in his portfolio that have a face value of
$1,000 and pay an 11% annual coupon. Bond L matures in 12 years, while Bond S matures
in 1 year.
a. What will the value of each bond be if the going interest rate is 6%, 8%, and 12%?
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.
b. Why does the longer-term bond’s price vary more than the price of the shorter-term
bond when interest rates change?

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