Crawford Inc. has two bond issues outstanding, both paying the same annual interest of $ 55, called Series A and Series b. Series A has a maturity of 12 years, whereas Series B has a maturity of 1 year.
a. What would be the value of each of these bonds when the going interest rate is (1) 4 percent, (2) 7 percent, and (3) 10 percent? Assume that there is only one more interest payment to be made on the Series B bonds.
b. Why does the longer- term (12- year) bond fluctuate more when interest rates change than does the shorter- term (1- year) bond?