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

Question

An investor has two bonds in his portfolio that both have a face value of $1,000 and pay a 9% annual coupon. Bond L matures in 14 years, while Bond S matures in 1 year.

Assume that there is only one more interest payment to be made on Bond S, at its maturity, and 14 more payments on Bond L.

a. What will the value of the Bond L be if the going interest rate is 4%? Round your answer to two decimal places at the end of the calculations.

b. What will the value of the Bond S be if the going interest rate is 4%? Round your answer to two decimal places at the end of the calculations.

c. What will the value of the Bond L be if the going interest rate is 8%? Round your answer to two decimal places at the end of the calculations.

d. What will the value of the Bond S be if the going interest rate is 8%? Round your answer to two decimal places at the end of the calculations.

e. What will the value of the Bond L be if the going interest rate is 14%? Round your answer to two decimal places at the end of the calculations.

f. What will the value of the Bond S be if the going interest rate is 14%? Round your answer to two decimal places at the end of the calculations.

g. Why does the longer-term bond's price vary more when interest rates change than does that of the shorter-term bond?

Explanation / Answer

a) Value = $1528.16 b) Value = $1048.08 c) Value = $ 1082.44 d) Value = $ 1009.86 e) Value = $699.89 f) Value = $956.14 g) The reason is simple, Long term has a larger maturity and more no. of coupons involved. So in case of an interest change, for short term only 1 coupon is affected, for long term 14 coupons is affected. The maturity also plays a big role for this

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