7.05

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 20 years, while Bond S matures in 1 year. a. What will the value of the Bond L be if the going interest rate is 5%, 6%, and 11%? Assume that only one more interest payment is to be made on Bond S at its maturity and that 20 more payments are to be made on Bond L. Round your answers to the nearest cent. 5% 6% 11% Bond L $ Bond S $ b. 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 decreases as a bond's maturity increases. II. Long-term bonds have lower interest rate risk than do short-term bonds. III. Long-term bonds have lower reinvestment rate risk than do short-term bonds. IV. The change in price due to a change in the required rate of return increases as a bond's maturity decreases. V. Long-term bonds have greater interest rate risk than do short-term bonds. -Select