Crawford Inc. has two bond issues outstanding, both paying the same annual inter
ID: 2702083 • Letter: C
Question
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 the value of each of these bond 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 mad 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 %u2013year) bond?
Explanation / Answer
Series A
a. 1. PV can be calculated in Excel as =PV(4%,12,-55,-1000). This is equal to 1140.78
a. 2. PV can be calculated in Excel as =PV(7%,12,-55,-1000). This is equal to 880.86
a. 3. PV can be calculated in Excel as =PV(10%,12,-55,-1000). This is equal to 693.38
Series B
a. 1. PV can be calculated in Excel as =PV(4%,1,-55,-1000). This is equal to 1014.42
a. 2. PV can be calculated in Excel as =PV(7%,1,-55,-1000). This is equal to 985.98
a. 3. PV can be calculated in Excel as =PV(10%,1,-55,-1000). This is equal to 959.09
The longer-term bond fluctuates more as its duration (or interest rate sensitivity) is higher. As there are more number of cashflows that all get impacted, and especially those in the later years get impacted severely, as compared to the one year bond where there is only cashflow to be impacted.
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