1) Bond Valuation and Interest Rate Risk
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 has a maturity of 1 year.
What will be the value of each of these bonds when the going rate of interest is (1) 5%, (2) 8%, and (3) 12%? Assume that there is only one more interest payment to be made on Bond S.
Why does the longer-term (15-year) bond fluctuate more when interest rates change than does the shorter-term bond (1 year)?
2) Yield to Maturity and Current Yield
You just purchased a bond that matures in 5 years/ The bond has a fave value of $1,000 and has an 8% annual coupon. The bond has a current yield of 8.21%. What is the bond’s yield to maturity?