Problem 7.05( Bond Valuation)

eBook Problem Walk-Through 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 the Bond L be if the going interest rate is 6%, 8%, and 12%? Assume that only one more interest payment is to be made on Bond 5 at its maturity and that 12 more payments are to be made on Bond L. Round your answers to the nearest cent. 6% -Select- 8% $ Bond L Bond S S b. Why does the longer-term bond's price vary more than the price of the shorter-term bond when interest rates change? 1. The change in price due to a change in the required rate of return decreases as a bond's maturity increases. II. Long-term bonds have lower interest rate risk than do short-term bonds. III. Long-term bonds have lower reinvestment rate risk than do short-term bonds. IV. The change in price due to a change in the required rate of return increases as a bond's maturity decreases V. Long-term bonds have greater interest rate risk than do short-term bonds. $ 12% S