Problem 7-5 Bond valuation

An investor has two bonds in his portfolio that both have a face value of $1,000 and pay a 8% annual coupon. Bond L matures in 11 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 11 more payments are to be made on Bond L.

What will the value of the Bond L be if the going interest rate is 5%? Round your answer to the nearest cent. $ What will the value of the Bond S be if the going interest rate is 5%? Round your answer to the nearest cent. $ What will the value of the Bond L be if the going interest rate is 10%? Round your answer to the nearest cent. $ What will the value of the Bond S be if the going interest rate is 10%? Round your answer to the nearest cent. $ What will the value of the Bond L be if the going interest rate is 14%? Round your answer to the nearest cent. $ What will the value of the Bond S be if the going interest rate is 14%? Round your answer to the nearest cent. $

Why does the longer-term bonds price vary more than the price of the shorter-term bond when interest rates change?

a) Long-term bonds have lower reinvestment rate risk then do short-term bonds.

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

c) Long-term bonds have greater interest rate risk then do short-term bonds.

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

e) Long-term bonds have lower interest rate risk then do short-term bonds.