Bond Valuation and Interest Rate Risk

The Garraty Company has two bond issues outstanding. Both bonds pay $100 annual interest plus $1,000 at maturity. Bond L has a maturity of 15 years, and Bond S has a maturity of 1 year.

1. 1. What will be the value of each of these bonds when the going rate of interest is 4%? Assume that there is only one more interest payment to be made on Bond S. Do not round intermediate calculations. Round your answers to the nearest cent.

      Bond L: --------------$

      Bond S: --------------$

   2. What will be the value of each of these bonds when the going rate of interest is 9%? Assume that there is only one more interest payment to be made on Bond S. Do not round intermediate calculations. Round your answers to the nearest cent.

      Bond L: --------------$

      Bond S: --------------$

   3. What will be the value of each of these bonds when the going rate of interest is 14%? Assume that there is only one more interest payment to be made on Bond S. Do not round intermediate calculations. Round your answers to the nearest cent.

      Bond L: -----------$

      Bond S: -----------$

2. Why does the longer-term (15-year) bond fluctuate more when interest rates change than does the shorter-term bond (1 year)?

   I. Longer-term bonds have less reinvestment rate risk than shorter-term bonds. II. Longer-term bonds have more interest rate risk than shorter-term bonds. III. Longer-term bonds have less interest rate risk than shorter-term bonds.

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