An investor has two bonds in his portfolio that both 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 there is only one more interest payment to be made on Bond S, at its maturity, and 15 more payments on Bond L.
B. Why does the longer-term bond's price vary more when interest rates change than does that of the shorter-term bond?
Please see the attached Excel spreadsheet.
Bond L Bond S Bond L Value Bond S Value
Par Value $1,000 $1,000
Maturity Date 15 1
Annual Coupon Payments $100 $100
Market Interest Rate 5% 5% ($1,037.97) ($95.24)
Market Interest ...
The values of bonds with different interest rates are calculated. An explanation of why longer term bond prices vary more wen interest rates change than shorter term bonds is given.