Question

7-3: Bond Valuation Bond valuation An Investor has two bonds in his portfolio that both have a face value of $1,000 and pay a 11% annual coupon. Bond L matures in 14 years, while Bond S matures in 1 year Assume that only one more interest payment is to be made on Bond Sat its maturity and that 14 more payments are to be made on Bond L a. What will the value of the Bond L be if the going interest rate is 4%? Round your answer to the nearest cent. What will the value of the Bond S be if the going interest rate is 4%7 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%7 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. 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 reinvestment rate risk then do short-term bonds. II. The change in price due to a change in the required rate of return increases as a bond's maturity decreases. III. Long-term bonds have greater interest rate risk then do short-term bonds. IV. The change in price due to a change in the required rate of return decreases as a bond's maturity increases. V. Long-term bonds have lower interest rate risk then do short-term bonds. -Select- Check My WC

Answer 1

rate positively ..

ans a)	We have to use financial calculator to solve this proble
			Case 1	Case 2	Case 3	Case 4	Case 5	Case 6
			L @4%	S @4%	L @10%	S @10%	L @13%	S @13%
		FV	1000	1000	1000	1000	1000	1000
		PMT	110	110	110	110	110	110
		N	14	1	14	1	14	1
		I	4%	4%	10%	10%	13%	13%
		Compute PV	($1,739.42)	($1,067.31)	($1,073.67)	($1,009.09)	($873.95)	($982.30)
		Ans =	$1,739.42	$1,067.31	$1,073.67	$1,009.09	$873.95	$982.30
ans b)	Correct answer is option III - Long term bonds have greater interest rate risk then do short term bond.