5-9 The Garraty Company has two bonds issues outstanding. Both bonds pay $100 annual interest plus
$1,000 at maturity. Bond L has a maturity of 15 years, and Bond S a maturity of 1 year.
5-9 Bond valuation and interest rate risk
Corporate Finance 3ed A Focused Approach By Michael C. Ehrhardt, Eugene F. Brigham
Financial Management: Theory and Practice By Eugene F. Brigham, Michael C. Ehrhardt 13ed
5-9 The Garraty Company has two bonds issues outstanding. Both bonds pay $100 annual interest plus
$1,000 at maturity. Bond L has a maturity of 15 years, and Bond S a maturity of 1 year.
(1) 5 percent,
(2) 8 percent, and
(3) 12 percent? 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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