Bond

relationship)

Mason, Inc. has two bond issues outstanding, called Series A and Series B, both paying the same annual interest of

$95.

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)

6

percent, (2)

11

percent, and (3)

13

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?a. When the going interest rate is

6

percent, the value of Series A bonds would be

$nothing .

(Round to the nearest cent.)When the going interest rate is

11

percent, the value of Series A bonds would be

$ .

(Round to the nearest cent.)When the going interest rate is

13

percent, the value of Series A bonds would be

$ .

(Round to the nearest cent.)When the going interest rate is

6

percent, the value of Series B bonds would be

$ .

(Round to the nearest cent.)When the going interest rate is

11

percent, the value of Series B bonds would be

$ .

(Round to the nearest cent.)When the going interest rate is

13

percent, the value of Series B bonds would be

$ .

(Round to the nearest cent.)b. Why does the longer-term

(12-year)

bond fluctuate more when interest rates change than does the shorter-term

(1-year)

bond?(Select the best choice below.)

A.

Because longer-term bondholders are locked into a particular interest rate for a longer period of time but are not exposed to any interest rate risk.

B.

Because longer-term bondholders are locked into a particular interest rate for a longer period of time and are therefore exposed to more interest rate risk.

C.

Because longer-term bondholders are locked into a particular interest rate for a longer period of time but are exposed to same interest rate risk as short-term bondholders.

D.

Because longer-term bondholders are locked into a particular interest rate for a longer period of time and are therefore exposed to less interest rate risk.