Garraty Company - Value of two bonds
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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)?
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Solution Summary
The value of two bonds with different maturities is calculated for different going interest rates. The reason why the value of the longer-term bond fluctuates more when interest rates change than does the shorter-term bond is discussed (see attachment).
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