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7-5 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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Nelly Stracke
Nelly StrackeLv2
28 Sep 2019

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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?

Exercise on Bond Valuation.

An investor has two bonds in her portfolio that have a face value of $1000 and pay a 10% annual coupon. Bond A matures in 15 years, while Bond B matures in 1 year.

What will the value of each bond be if the going interest rate is 5%, 8%, and 12%. ? Assume that only one more interest payment is to be made on Bond B at its maturity, and that 15 more payments are to be made on bond A.

Why does the longer-term bond price vary more than the price of the shorter-term bond when interest rates change ?

Please show your work solve problem in detail.

An investor has two bonds in his portfolio that both have a face value of $1,000 and pay a 7% annual coupon. Bond L matures in 13 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 13 more payments are to be made on Bond L.

Assume that only one more interest payment is to be made on Bond S at its maturity and that 13 more payments are to be made on Bond L.

a. What will the value of the Bond L be if the going interest rate is 4%? Round your answer to the nearest cent.
$

What will the value of the Bond S be if the going interest rate is 4%? Round your answer to the nearest cent.
$

What will the value of the Bond L be if the going interest rate is 8%? Round your answer to the nearest cent.
$

What will the value of the Bond S be if the going interest rate is 8%? Round your answer to the nearest cent.
$

What will the value of the Bond L be if the going interest rate is 12%? Round your answer to the nearest cent.
$

What will the value of the Bond S be if the going interest rate is 12%? 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?

I. The change in price due to a change in the required rate of return increases as a bond's maturity decreases.

II. Long-term bonds have greater interest rate risk then do short-term bonds.

III. The change in price due to a change in the required rate of return decreases as a bond's maturity increases.

IV. Long-term bonds have lower interest rate risk then do short-term bonds.

V. Long-term bonds have lower reinvestment rate risk then do short-term bonds

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