An investor has two bonds in his portfolio that have a face value of $1,000 and pay a 9% annual coupon. Bond L matures in 10 years, while Bond S matures in 1 year.

a. What will the value of the Bond L be if the going interest rate is 6%, 7%, and 10%? Assume that only one more interest payment is to be made on Bond S at its maturity and that 10 more payments are to be made on Bond L. Round your answers to the nearest cent. Answer for 6%, 7%, and 10% for both Bond L and Bond S.

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

1. The change in price due to a change in the required rate of return decreases as a bond's maturity increases.
2. Long-term bonds have lower interest rate risk than do short-term bonds.
3. Long-term bonds have lower reinvestment rate risk than do short-term bonds.
4. The change in price due to a change in the required rate of return increases as a bond's maturity decreases.
5. Long-term bonds have greater interest rate risk than do short-term bonds.