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 a maturity of 1 year.

(a) What will be the value of each of these bonds when the going

rate of interest is (1) 5 percent (2) 8 percent and (3) 12 percent?

Assume that there is only one more interest payment to be

made on Bond S.

(b) Why does the longer-term (15-year) bond fluctuate more when

interest rates change than does the shorter-term bond (1 year)?