Problem 75 Bond valuation An investor has two bonds in his p

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 20 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 20 more payments are to be made on Bond L. a. What will the value of the Bond L be if the going interest rate is 6%? Round your answer to the nearest cent. what will the value of the Bond S be if the going interest rate is 6%? Round your answer to the nearest cent. What will the value of the Bond L be if the going interest rate is 9%? Round your answer to the nearest cent. what will the value of the Bond S be if the going interest rate is 9%? Round your answer to the nearest cent. what will the value of the Bond L be if the going interest rate is 11%? Round your answer to the nearest cent What will the value of the Bond S be if the going interest rate is 11%? Round your answer to the nearest cent. b. Why does the longer-term bond\'s price vary more than the price of the shorter-term bond when interest rates change? I. The change in price due to a change in the required rate of return increases as a bond\'s maturity decreases. II. Long-term bonds have greater interest rate risk then do short-term bonds. III. The change in price due to a change in the required rate of return decreases as a bond\'s maturity increases. IV. Long-term bonds have lower interest rate risk then do short-term bonds term bonds have lower reinvestment rate risk then do short-term bonds. -Select- IV

Solution

a). i).

ii).

iii).

iv).

v).

vi).

b). Option II is correct. There is a greater probability that interest rates will rise (and thus negatively affect abond\'s market price) within a longer time period than within a shorter period.

INPUT	20	6		80	1,000
TVM	N	I/Y	PV	PMT	FV
OUTPUT			-$1,229.40