Question
1. Mason, Inc. has two bond issues outstanding, called Series A and Series B, both paying the same annual interest of $95. Series A has
1. Mason, Inc. has two bond issues outstanding, called Series A and Series B, both paying the same annual interest of $95. Series A has a maturity of 12 years, whereas Series B has a maturity of 1 year.
a. When the going interest rate is 5 percent, the value of Series A bonds would be $_______ (Round to the nearest cent.)
b. When the going interest rate is 9 percent, the value of Series A bonds would be $_______
c. When the going interest rate is 12 percent, the value of Series A bonds would be $_______ (Round to the nearest cent.)
d. When the going interest rate is 5 percent, the value of Series B bonds would be $_______ (Round to the nearest cent.)
e. When the going interest rate is 9 percent, the value of Series B bonds would be $_______ (Round to the nearest cent.)
f. When the going interest rate is 12 percent, the value of Series B bonds would be $_______ (Round to the nearest cent.)
2. Why does the longer-term (12-year) bond fluctuate more when interest rates change than does the shorter-term (1-year) bond? (Select the best choice below.)
Because longer-term bondholders are locked into a particular interest rate for a longer period of time and are therefore exposed to more interest rate risk.
Because longer-term bondholders are locked into a particular interest rate for a longer period of time but are exposed to same interest rate risk as short-term bondholders.
Because longer-term bondholders are locked into a particular interest rate for a longer period of time and are therefore exposed to less interest rate risk.
Because longer-term bondholders are locked into a particular interest rate for a longer period of time but are not exposed to any interest rate risk.
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