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 17 years, while Bond S matures in 1 year. a. What will the value of the Bond L be if the going interest rate is 7%, 8%, and 12%? Assume that only one more interest payment is to be made on Bond S at its maturity and that 17 more payments are to be made on Bond L. Round your answers to the nearest cent. 7% 8% 12% Bond L $ Bond S $ b. Why does the longer-term bond's price vary more than the price of the shorter-term bond when interest rates change? 1. Long-term bonds have lower interest rate risk than do short-term bonds. II. Long-term bonds have lower reinvestment rate risk than do short-term bonds. III. The change in price due to a change in the required rate of return increases as a bond's maturity decreases. IV. Long-term bonds have greater interest rate risk than do short-term bonds. V. The change in price due to a change in the required rate of return decreases as a bond's maturity increases.
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 17 years, while Bond S matures in 1 year. a. What will the value of the Bond L be if the going interest rate is 7%, 8%, and 12%? Assume that only one more interest payment is to be made on Bond S at its maturity and that 17 more payments are to be made on Bond L. Round your answers to the nearest cent. 7% 8% 12% Bond L $ Bond S $ b. Why does the longer-term bond's price vary more than the price of the shorter-term bond when interest rates change? 1. Long-term bonds have lower interest rate risk than do short-term bonds. II. Long-term bonds have lower reinvestment rate risk than do short-term bonds. III. The change in price due to a change in the required rate of return increases as a bond's maturity decreases. IV. Long-term bonds have greater interest rate risk than do short-term bonds. V. The change in price due to a change in the required rate of return decreases as a bond's maturity increases.
Chapter6: Fixed-income Securities: Characteristics And Valuation
Section: Chapter Questions
Problem 4P
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Question
![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 17 years, while Bond S matures in 1 year.
a. What will the value of the Bond L be if the going interest rate is 7%, 8%, and 12%? Assume that only one more interest payment is to be made on Bond S at its maturity
and that 17 more payments are to be made on Bond L. Round your answers to the nearest cent.
7%
12%
8%
$
Bond L
$
Bond S $
$
b. Why does the longer-term bond's price vary more than the price of the shorter-term bond when interest rates change?
1. Long-term bonds have lower interest rate risk than do short-term bonds.
II. Long-term bonds have lower reinvestment rate risk than do short-term bonds.
III. The change in price due to a change in the required rate of return increases as a bond's maturity decreases.
IV. Long-term bonds have greater interest rate risk than do short-term bonds.
V. The change in price due to a change in the required rate of return decreases as a bond's maturity increases.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F50fae6d0-f94e-45c9-a449-3aa8417f3829%2F2e894143-6ba1-43d6-9999-be5a0fd8cd37%2Fqft0fb_processed.jpeg&w=3840&q=75)
Transcribed Image Text: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 17 years, while Bond S matures in 1 year.
a. What will the value of the Bond L be if the going interest rate is 7%, 8%, and 12%? Assume that only one more interest payment is to be made on Bond S at its maturity
and that 17 more payments are to be made on Bond L. Round your answers to the nearest cent.
7%
12%
8%
$
Bond L
$
Bond S $
$
b. Why does the longer-term bond's price vary more than the price of the shorter-term bond when interest rates change?
1. Long-term bonds have lower interest rate risk than do short-term bonds.
II. Long-term bonds have lower reinvestment rate risk than do short-term bonds.
III. The change in price due to a change in the required rate of return increases as a bond's maturity decreases.
IV. Long-term bonds have greater interest rate risk than do short-term bonds.
V. The change in price due to a change in the required rate of return decreases as a bond's maturity increases.
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