Bond Evaluation: An investor has two bonds in his portfolio that have a face value of $1,000 and pays a 10% annual coupon. Bond L matures in 15 years, while bond s matures in 1 year.
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1. What will the value of each bond be if the going interest rate is 5%, 8% and 12%? Assume that only one more interest payment is to be made on bond S at its maturity and that 15 more interest payment is to be made to bond L?
2. Why does the longer-term bond’s price vary more than the price of the shorter-term bond when interest rates change?