An investor has two bonds in his portfolio that have a face value of $1,000 and pay a 7% annual coupon. Bond L matures in 12 years, while Bond S matures in 1 year. Assume that only one more interest payment is to be made on Bond S at its maturity and that 12 more payments are to be made on Bond L.

a.

What will the value of the Bond L be if the going interest rate is 6%? (Round all your answers to the nearest cent)

What will the value of the Bond L be if the going interest rate is 8%?

What will the value of the Bond L be if the going interest rate is 12%?

b.

What will the value of the Bond S be if the going interest rate is 6%? (Round your answer to the nearest cent)

What will the value of the Bond S be if the going interest rate is 8%?

What will the value of the Bond S be if the going interest rate is 12%?

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