The Allison 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 has a maturity of one year. Interest is paid annually.
A) What will be the value of each of these bonds when the going rate of interest is (1) 5 percent, (2) 7 percent, and (3) 11 percent? Assume 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)?
You need to use either a financial calculator or Excel to solve this problem. I'll show you the formula in Excel since financial calculators vary.
Use the following formula in Excel:
The solution goes into a great amount of detail about bond valuation. Excel formulas are shown which will help the student solve such questions with ease in the future. They are very easy to understand and any student can easily follow along. Overall, an excellent response.