3. BOND VALUATION

a) An investor has two bonds in his portfolio that have a face value of RM1000 and pay a 10% annual coupon. Bond L matures in 15years, while Bond S matures in 1 year.

b) What will the value of each bond be if the going interest rate is 15%, 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.

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