1,000 and pay an 11% annual coupon. Bond L matures in 12 years, while Bond S m 1 year. a. What will the value of each bond be if the going interest rate is 6%, 8%, and 12% Assume that only one more interest payment is to be made on Bond S at its mat and that 12 more payments are to be made on Bond L. b. Why does the longer-term bond's price vary more than the price of the shorter-t hond on intoront
1,000 and pay an 11% annual coupon. Bond L matures in 12 years, while Bond S m 1 year. a. What will the value of each bond be if the going interest rate is 6%, 8%, and 12% Assume that only one more interest payment is to be made on Bond S at its mat and that 12 more payments are to be made on Bond L. b. Why does the longer-term bond's price vary more than the price of the shorter-t hond on intoront
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Concept explainers
Debenture Valuation
A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.
Note Valuation
It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:
Question
![BOND VALUATION An investor has two bonds in his portfolio that have a face value of
$1,000 and pay an 11% annual coupon. Bond L matures in 12 years, while Bond S matures
in 1 year.
a. What will the value of each bond be if the going interest rate is 6%, 8%, and 12%?
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.
b. Why does the longer-term bond's price vary more than the price of the shorter-term
bond when interest rates change?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Ff64d3486-45ea-449a-b170-79f6e509c7f4%2F0c6ddc26-d8a5-4f79-98ec-159ef2a929e0%2Fnruwh43_processed.png&w=3840&q=75)
Transcribed Image Text:BOND VALUATION An investor has two bonds in his portfolio that have a face value of
$1,000 and pay an 11% annual coupon. Bond L matures in 12 years, while Bond S matures
in 1 year.
a. What will the value of each bond be if the going interest rate is 6%, 8%, and 12%?
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.
b. Why does the longer-term bond's price vary more than the price of the shorter-term
bond when interest rates change?
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