eBook Problem Walk$-$Through

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 $11$ years, while Bond S matures in $1$ year.

What will the value of the Bond L be if the going interest rate is $7\%,8\%,$ and $12\%?$ Assume that only one more interest payment is to be made on Bond S at its maturity and that $11$ more payments are to be made on Bond L$.$ Round your answers to the nearest cent.

$7\%8\%12\%$

Bond L $

$

$

Bond S $

$

$

Why does the longer$-$term bond$$s price vary more than the price of the shorter$-$term bond when interest rates change?

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.

The change in price due to a change in the required rate of return increases as a bond's maturity decreases.