The Garraty Company has two bond issues outstanding. Both bonds pay $100 annual interest plus $1,000 at maturity. Bond L has a maturity of 15 years, and Bond S a maturity of 1 year.
a. What will be the value of each of these bonds when the going rate of interest is (1) 5 percent, (2) 8 percent, and (3) 12 percent? Assume that there is only one more interest payment to be made on Bond S.
b. Why does the longer-term (15-year) bond fluctuate more when interest rates change than does the shorter-term bond (1-year)?© BrainMass Inc. brainmass.com June 3, 2020, 8:13 pm ad1c9bdddf
a. The value of the bonds is the present value of the principal and interest discounted at the going rate of interest.
BondS - Value = 100/(1.05) + 1,000/(1.05) = 1,047.62
Bond L - The interest amount is an annuity and we use the PVIFA table to get the present value. The principal amount is a lumpsum ...
The solution explains how to calculate the value of a bond.