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 19 years, while Bond S matures in 1 year. a. What will the value of the Bond L be if the going interest rate is 6%, 7%, and 12%? Assume that only one more interest payment is to be made on Bond S at its maturity and that 19 more payments are to be made on Bond L. Round your answers to the nearest cent. 6% 7% 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? 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 than 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. Long-term bonds have lower interest rate risk than do short-term bonds. Long-term bonds have lower reinvestment rate risk than do short-term bonds.
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 19 years, while Bond S matures in 1 year. a. What will the value of the Bond L be if the going interest rate is 6%, 7%, and 12%? Assume that only one more interest payment is to be made on Bond S at its maturity and that 19 more payments are to be made on Bond L. Round your answers to the nearest cent. 6% 7% 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? 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 than 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. Long-term bonds have lower interest rate risk than do short-term bonds. Long-term bonds have lower reinvestment rate risk than do short-term bonds.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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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 19 years, while Bond S matures in 1 year.
a. What will the value of the Bond L be if the going interest rate is 6%, 7%, and 12%? Assume that only one more interest payment is to be made on Bond S at its maturity and that 19 more payments are to be made on Bond L. Round your answers to the nearest cent.
| 6% | 7% | 12% | |
| Bond L | $ | $ | $ |
| Bond S | $ | $ | $ |
b. Why does the longer-term
- 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 than 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.
- Long-term bonds have lower interest rate risk than do short-term bonds.
- Long-term bonds have lower reinvestment rate risk than do short-term bonds.
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