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Graph two bonds each with a face value of $1000. Both bonds have a coupon rate of 14.9% paid SEMIANNUALY. Bond LONG has a maturity of 20 years and Bond SHORT has a maturity of one year. Compute the value of the bonds for annual interest rates of 2-20% at increments of 2%.

What is the value of the SEMIANNUAL coupon?

When creating your graph of the Short and Long bond what variable is the independent variable and what variable is the dependent variable for both bonds?

		The independent variable is the present value and the dependent variable is the bond value or price.
		The independent variable is bond value and the dependent variable is the interest rate or price.
		The independent variable is the number of years and the dependent variable is the bond value or price.
		The independent variable is interest rate and the dependent variable is the bond value or price.

When creating the data set for the price of the Long and Short Bonds an efficient way would be to list the variables in one row in EXCEL. The variables would include the FV, i/y, n (short), n (long), pmt, and PV (short), PV (long). When computing the PV for the Short and Long bond you would use the PV function in EXCEL. Which variable(s) will be different when computing the PV of the Long and Short Bond for a given interest rate.

		All the variable will be the same except the number of periods.
		All the variables will be the same except the interest rate.
		All of the variables will be the same except the Future value of the bonds and the number of periods.
		All the variables will be different except the number of periods.

The graph you created in problem one illustrates the degree to which the price of the long term and short term bond is sensitive to changes in interest rates. This sensitivity to a change in interest rates is called interest rate or price risk. Which of the bonds has the most interest rate risk if the current interest rate is 5%?

		The long term bond has the most interest rate risk as demonstrated by the variability in price.
		The long term bond has the most interest rate risk as demonstrated by the steepness of its curve.
		They both have the same amount of interest rate risk.
		The short term bond has the most interest rate risk as demonstrated by the lack of slope of its curve.
		Both the greater slope of the curve and/or the greater variability in the interest rates indicate that the long term bond has more interest rate (price) risk.

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