? Bond relationship ) ?Mason, Inc. has two bond issues outstanding, called Serie

Question

?Bond relationship) ?Mason, Inc. has two bond issues outstanding, called Series A and Series? B, both paying the same annual interest of $85 Series A has a maturity of 12 years, whereas Series B has a maturity of 1 year.

a. What would be the value of each of these bonds when the going interest rate is (1) 5 percent, (2) 9 percent, and (3) 12 percent? Assume that there is only one more interest payment to be made on the Series B bonds.

b. Why does the longer-term (12-year) bond fluctuate more when interest rates change than does the? shorter-term (11-year) bond?

Explanation / Answer

The longer term bond fluctuate more when interest rats chnage that is because long term bonds have more probability for change in interest rate that is increase in interest rate than the short term bonds.

If going interest rate is 5%, than value of series A bond is Value of Series A Bond = 85*8.863252 + 1000*0.556837 1310.213 Value of Series B Bond = 85*0.952381 + 1000*0.952381 1033.333 If going interest rate is 9%, than value of series A bond is Value of Series A Bond = 85*7.160725 + 1000*0.355535 964.1966 Value of Series B Bond = 85*0.917431 + 1000*0.917431 995.4126 If going interest rate is 12%, than value of series A bond is Value of Series A Bond = 85*6.194374 + 1000*0.256675 783.1968 Value of Series B Bond = 85*0.892857 + 1000*0.892857 968.7498

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