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 10% annual coupon, Bond L matures in 10 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 10 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 4%? Round your answer to the nearest cent. What will the value of the Bond S be if the going interest rate is 4%? Round your answer to the nearest cent. what will the value of the Bond L be if the going interest rate is 8%? Round your answer to the nearest cent. what will the value of the Bond S be if the going interest rate is 8%? 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. b. Why does the longer-term bond\'s price vary more than the price of the shorter-term bond when interest rates change? I. Long-term bonds have greater interest rate risk then do short-term bonds. II. The change in price due to a change in the required rate of return decreases as a bond\'s maturity increases. III. Long-term bonds have lower interest rate risk then do short-term bonds. IV. Long-term bonds have lower reinvestment rate risk then do short-term bonds. V. The change in price due to a change in the required rate of return increases as a bond\'s maturity decreases. Select-

Solution

Use PV function in excel to calculate price of bond

b. I. Lng term bonds have greater interest rate risk then do short term bonds

	4%	8%	14%
L	$1,486.65	$1,134.20	$791.36
S	$1,057.69	$1,018.52	$964.91