Question

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)?

Fig: 1

Fig: 2

Fig: 3

Fig: 4

Fig: 5