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An investor has two bonds in his portfolio that have a face value of $1,000...

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Finance

An investor has two bonds in his portfolio that have a face value of $1,000 and pay a 10% annual coupon. Bond L matures in 17 years, while Bond S matures in 1 year.

a. What will the value of the Bond L be if the going interest rate is 7%, 8%, and 11%? Assume that only one more interest payment is to be made on Bond S at its maturity and that 17 more payments are to be made on Bond L. Round your answers to the nearest cent.

7% 8% 11%

Bond L $ $ $

Bond S $ $ $

b. Why does the longer-term bonds price vary more than the price of the shorter-term bond when interest rates change? The change in price due to a change in the required rate of return decreases as a bond's maturity increases. Long-term bonds have lower interest rate risk than do short-term bonds. Long-term bonds have lower reinvestment rate risk than do short-term bonds. The change in price due to a change in the required rate of return increases as a bond's maturity decreases. Long-term bonds have greater interest rate risk than do short-term bonds.

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