Question

Financial Derivative And Risk Management

The FAMA Company has two bond issues outstanding. Both bonds pay $100 annual interestplus $1000 face value at maturity. Bond L has a maturity of 15 years, and Bond S has a maturityof 1-year.

What will be the value of each of these bonds when the going rate of interest (yield to maturity)is:

A) 8%

B) 12%

Why does the longer-term (15-year) bond fluctuate more when interest rates change than does the shorter-term bond (1-year)?


Answer

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