Bond Valuation: 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 12 years, while bond S matures in 1 year.

a. What will the value of each bond be if the going interest rate is 6%,8% and 12%. 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.

B. Why does the longer term bond's price vary more than the price of the shorter term bond when interest rates change?