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    The Heymann company's bonds have 4 years remaining to maturity. Interest is paid annually; the bonds have a $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 %, and (3) 12 %. 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 bonds (1 year)?

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    Solution Preview

    a/ (see doc for for more information)


    S bond
    $1000 = (1 + interest/100)*(initial value)
    initial value = $1000/(1 + interest/100)

    L bond
    Year1 = (1 + interest/100)*(initial value)

    Year2 = (1 + interest/100)*Year1 = (1 + ...

    Solution Summary

    This is a pair of bond value questions.