Why longer-term bond fluctuate when interest rates change, Financial Accounting

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Why longer-term bond fluctuate when interest rates change

Problem

The Katy 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%, and (2) 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)?

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Financial Accounting: Why longer-term bond fluctuate when interest rates change

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Financial Accounting: Why longer-term bond fluctuate when interest rates change

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