Problem Walk-Through

An investor has two bonds in his portfolio that have a face value of $1,000 and pay a 9% annual coupon. Bond L matures in 19 years, while Bond S matures in 1 year.

What will the value of the Bond L be if the going interest rate is 5%, 6%, and 10%? Assume that only one more interest payment is to be made on Bond S at its maturity and that 19 more payments are to be made on Bond L. Round your answers to the nearest cent.

5%. 6% 10%

Bond L $ __ $ __ $ __

Bond S $ __ $ __ $ __

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

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

B)Long-term bonds have greater interest rate risk than do short-term bonds.

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

D)Long-term bonds have lower interest rate risk than do short-term bonds.

E)Long-term bonds have lower reinvestment rate risk than do short-term bonds.