Bond Valuation and Interest Rate Risk The Garraty Company has two bond issues outstanding. Both bonds pay $100 annual interest plus $1,000 at maturity. Bond L has a maturity of 15 years, and Bond S has a maturity of 1 year. What will be the value of each of these bonds when the going rate of interest is 5%? Assume that there is only one more interest payment to be made on Bond S. Round your answers to the nearest cent. Bond L $ Bond S $ What will be the value of each of these bonds when the going rate of interest is 9%? Assume that there is only one more interest payment to be made on Bond S. Round your answers to the nearest cent. Bond L $ Bond S $ What will be the value of each of these bonds when the going rate of interest is 13%? Assume that there is only one more interest payment to be made on Bond S. Round your answers to the nearest cent. Bond L $ Bond S $ Why does the longer-term (15-year) bond fluctuate more when interest rates change than does the shorter-term bond (1 year)?I. Longer-term bonds have more reinvestment rate risk than shorter-term bonds.II. Shorter-term bonds have more interest rate risk than longer-term bonds.III. Longer-term bonds have more interest rate risk than shorter-term bonds.-Select-I/II/III

Question

Bond Valuation and Interest Rate Risk

The Garraty Company has two bond issues outstanding. Both bonds pay $100 annual interest plus $1,000 at maturity. Bond L has a maturity of 15 years, and Bond S has a maturity of 1 year.

  1. What will be the value of each of these bonds when the going rate of interest is 5%? Assume that there is only one more interest payment to be made on Bond S. Round your answers to the nearest cent.
    Bond L $
    Bond S $


  2. What will be the value of each of these bonds when the going rate of interest is 9%? Assume that there is only one more interest payment to be made on Bond S. Round your answers to the nearest cent.
    Bond L $
    Bond S $


  3. What will be the value of each of these bonds when the going rate of interest is 13%? Assume that there is only one more interest payment to be made on Bond S. Round your answers to the nearest cent.
    Bond L $
    Bond S $



Why does the longer-term (15-year) bond fluctuate more when interest rates change than does the shorter-term bond (1 year)?
I. Longer-term bonds have more reinvestment rate risk than shorter-term bonds.
II. Shorter-term bonds have more interest rate risk than longer-term bonds.
III. Longer-term bonds have more interest rate risk than shorter-term bonds.
-Select-I/II/III

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