Problem 5-9 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.

What will be the value of each of these bonds when the going rate of interest is 5%? Assume that there is only one more interest payment to be made on Bond S. Round your answers to the nearest cent.

Bond L	$
Bond S	$

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. Round your answers to the nearest cent.

Bond L	$
Bond S	$

What will be the value of each of these bonds when the going rate of interest is 11%? Assume that there is only one more interest payment to be made on Bond S. Round your answers to the nearest cent.

Bond L	$
Bond S	$

Why does the longer-term (15-year) bond fluctuate more when interest rates change than does the shorter-term bond (1 year)? -Select- I. Shorter-term bonds have more interest rate risk than longer-term bonds. II. Longer-term bonds have more interest rate risk than shorter-term bonds. III. Longer-term bonds have more reinvestment rate risk than shorter-term bonds.