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An investor has two bonds in his portfolio that have a face value of $1,000 and pay an 11% annual coupon. Bond L matures in

An investor has two bonds in his portfolio that have a face value of $1,000 and pay an 11% annual coupon. Bond L matures in 19 years, while Bond S matures in 1 year.

  1. What will the value of the Bond L be if the going interest rate is 6%, 7%, and 12%? Assume that only one more interest payment is to be made on Bond S at its maturity and that 19 more payments are to be made on Bond L. Round your answers to the nearest cent.

    6% 7% 12%
    Bond L $ $ $
    Bond S $ $ $

  2. 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.

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