Moonlight, Inc. has issued two types of bonds. A1 and A2 . Both of them is paying annual interst of

$105.

Maturity of A1 is

12

years. Maturity of A2 is

1

year.

a. Find the value A1 and A2 when the market interest rate is (1)

7

percent, (2)

8

percent, and (3)

14

percent? Assume that there is only one more interest payment to be made on the A2 bonds.

b. Why does the

(12-year)

bond fluctuate more when interest rates change than does the

(1-year)

bond?

a. When market rate is

7

percent, the value of A1 bonds would be

$nothing.

(Round to the nearest cent.)

When market rate is

8

percent, the value of A1 bonds would be

$nothing.

(Round to the nearest cent.)

When the market rate is

14

percent, the value of A1 bonds would be

$nothing.

(Round to the nearest cent.)

When the market rate is

7

percent, the value of Series A2 bonds would be

$nothing.

(Round to the nearest cent.)

When the market rate is

8

percent, the value of Series A2 bonds would be

$nothing.

(Round to the nearest cent.)

When the market rate is

14

percent, the value of Series A2 bonds would be

$nothing.

(Round to the nearest cent.)

b. Why does the

(12-year)

bond fluctuate more when interest rates change than does the

(1-year)

bond?(Select the best choice below.)

A.

Because longer-term bondholders are locked into a particular interest rate for a longer period of time and are therefore exposed to less interest rate risk.

B.

Because longer-term bondholders are locked into a particular interest rate for a longer period of time and are therefore exposed to more interest rate risk.

C.

Because longer-term bondholders are locked into a particular interest rate for a longer period of time but are exposed to same interest rate risk as short-term bondholders.

D.

Because longer-term bondholders are locked into a particular interest rate for a longer period of time but are not exposed to any interest rate risk.