Problem 7-5 Bond valuation An investor has two bonds in his portfolio that both
ID: 2823830 • Letter: P
Question
Problem 7-5 Bond valuation An investor has two bonds in his portfolio that both have a face value of $1,000 and pay a 8% annual coupon, Bond L matures in 20 years, while Bond S matures in 1 year Assume that only one more interest payment is to be made on Bond S at its maturity and that 20 more payments are to be made on Bond L. a. What will the value of the Bond L be if the going interest rate is 6%? Round your answer to the nearest cent. what will the value of the Bond S be if the going interest rate is 6%? Round your answer to the nearest cent. What will the value of the Bond L be if the going interest rate is 9%? Round your answer to the nearest cent. what will the value of the Bond S be if the going interest rate is 9%? Round your answer to the nearest cent. what will the value of the Bond L be if the going interest rate is 11%? Round your answer to the nearest cent What will the value of the Bond S be if the going interest rate is 11%? Round your answer to the nearest cent. b. Why does the longer-term bond's price vary more than the price of the shorter-term bond when interest rates change? I. The change in price due to a change in the required rate of return increases as a bond's maturity decreases. II. Long-term bonds have greater interest rate risk then do short-term bonds. III. The change in price due to a change in the required rate of return decreases as a bond's maturity increases. IV. Long-term bonds have lower interest rate risk then do short-term bonds term bonds have lower reinvestment rate risk then do short-term bonds. -Select- IVExplanation / Answer
a). i).
ii).
iii).
iv).
v).
vi).
b). Option II is correct. There is a greater probability that interest rates will rise (and thus negatively affect abond's market price) within a longer time period than within a shorter period.
INPUT 20 6 80 1,000 TVM N I/Y PV PMT FV OUTPUT -$1,229.40