Bond Valuation: Ttwo bonds. Each bond has a face value of $1000 and pays an 8 pe
ID: 2637533 • Letter: B
Question
Bond Valuation: Ttwo bonds. Each bond has a face value of $1000 and pays an 8 percent annual coupon. Bond X matures in 1 year, and Bond Y matures in 15 years.
If the going interest rate is 4 percent, 9 percent, and 14 percent, what will the value of each bond be? Assume Bond X only has one more interest payment to be made at maturity. Assume there are 15 more payments to be made on Bond Y.
The longer-term bond's price varies more than the shorter-term bond's price when interest rates change. Explain why.
Please provide calculations.
Explanation / Answer
if the interest rate is 4%, then investors prefer to purchase bonds with 8% coupon rate, when the interest rates are higher than coupon rates, investor prefers to deposit in banks only.
The longer-term bond's price varies more than the shorter-term bond's price when interest rates change.because every variation in the interest reflects bond price and the expected return in future.
if the interest rate is high, the bond should also pay high interest rates otherwise invstors may not invest in bonds.