BOND VALUATION 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 15 years, while Bond S matures in 1 year.

a. 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 S at its maturity and that 15 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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