Problem: An investor has two bonds in his portfolio that both have a face value of $1,000 and pay a 10% annual coupon. Bond L matures in 15 years, while Bond S matures in 1 year.
Q1. What will the value of each bond be if the going interest rate is 5%, 8%, and 12%. Assume that there is only one more interest payment to be made on Bond S, at its maturity, and 15 more payments on Bond L.
Q2. Why does the longer-term bond's price vary more when interest rates change than does that of the shorter-term bond?