An investor has two bonds in his portfolio that both have a face value of $1,000
ID: 2735511 • Letter: A
Question
An investor has two bonds in his portfolio that both have a face value of $1,000 and pay a 12% annual coupon. Bond L matures in 12 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 12 more payments are to be made on Bond L.
What will the value of the Bond L be if the going interest rate is 6%? Round your answer to the nearest cent.
$
What will the value of the Bond S be if the going interest rate is 6%? Round your answer to the nearest cent.
$
What will the value of the Bond L be if the going interest rate is 10%? Round your answer to the nearest cent.
$
What will the value of the Bond S be if the going interest rate is 10%? Round your answer to the nearest cent.
$
What will the value of the Bond L be if the going interest rate is 13%? Round your answer to the nearest cent.
$
What will the value of the Bond S be if the going interest rate is 13%? Round your answer to the nearest cent.
$
Why does the longer-term bond’s price vary more than the price of the shorter-term bond when interest rates change?
Long-term bonds have lower interest rate risk then do short-term bonds.
Long-term bonds have lower reinvestment rate risk then 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 then do short-term bonds.
The change in price due to a change in the required rate of return decreases as a bond's maturity increases.
Explanation / Answer
Long-term bonds have greater interest rate risk then do short-term bonds. With short-term bonds, this risk is not as significant because interest rates are less likely to substantially change in the short term. Short-term bonds are also easier to hold until maturity, thereby alleviating an investor's concern about the effect of interest rate driven changes in the priceof bonds.
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