BOND VALUATION

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 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.

1. What will the value of the Bond L be if the going interest rate is 5%? Round your answer to the nearest cent. 2. What will the value of the Bond S be if the going interest rate is 5%? Round your answer to the nearest cent. 3. What will the value of the Bond L be if the going interest rate is 9%? Round your answer to the nearest cent. 4. What will the value of the Bond S be if the going interest rate is 9%? Round your answer to the nearest cent. 5. What will the value of the Bond L be if the going interest rate is 12%? Round your answer to the nearest cent. 6. What will the value of the Bond S be if the going interest rate is 12%? Round your answer to the nearest cent.

7. Why does the longer-term bonds price vary more than the price of the shorter-term bond when interest rates change? (select one below)

a. Long-term bonds have lower interest rate risk than do short-term bonds.

b. Long-term bonds have lower reinvestment rate risk than do short-term bonds.

c. The change in price due to a change in the required rate of return increases as a bond's maturity decreases.

d. Long-term bonds have greater interest rate risk than do short-term bonds.

e. The change in price due to a change in the required rate of return decreases as a bond's maturity increases.