Bond values
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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