The Desreumaux Company has two bond issues outstanding. Both bonds pay $100 annual interest plus $1,000 at maturity. Bond L has a maturity of 15 years and Bond S has a maturity of one year.
a. What will be the values of these bonds when the going rate of interest is (1) 5 percent, (2) 7 percent, and (3) 11 percent? Assume that there is only one more interest payment to be made on Bond S.
b. Why does the longer term (15-year) bond fluctuate more when interest rates change than does the shorter term bond (one-year)?

  • CreatedNovember 24, 2014
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