An investor has two bonds in his portfolio that have a face value of $1,000 and pay a 10% annual coupon. bond l matures in 15 years, while bond s matures in 1 year. a. what will the value of each bond be if the going interest rate is 5%, 8%, and 12%? assume that only one more interest payment is to be made on bond s at its maturity and that 15 more payments are to be made on bond l. b. why does the longer-term bond’s price vary more than the price of the shorter-term bond when interest rates change?

Bond S

When interest rate 5%

Coupon plus Principal/1+interest rate

Coupon = 100

1100/1.05=1047.6

When interest rate 8%

1100/1.08=1018.5

When interest rate 12%

1100/1.12=982.41

Bond L

This bond has 15 payments which means it will be very difficult to solve it manually and we have to do it on a financial calculator

Put

FV=1000

N=15

I= 5 or 8 or 12

PMT= 100

PV=?

When interest rate

5% PV= 1518.9

8% PV=1171

12% PV=863.3

The reason interest rate varies the price of longer term bonds more is because all the payments of the bond is discounted by the interest rate and the longer the bonds life the more number of payments and the more time they will be discounted which means long term bonds are very sensitive to interest rate changes or have a higher duration

Explanation:

i would have to say its c

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