Pacific Homecare has three bond issues outstanding. All three bonds pay $100 in annual interest plus...
Pacific Homecare has three bond issues outstanding. All three bonds pay $100 in annual interest plus $1,000 at maturity. Bond S has a maturity of five years, Bond M has a 15-year year maturity, and Bond L matures in 30 years.
a. What is the value of each of these bonds when the required interest rate is 10% and 15%?
b. Why is the price of Bond L more sensitive to interest rate changes than the price of Bond S?
Please show the formula used in excel spreadsheet.
Homework Answers
As Bond L has longest maturity, it has highest duration and hence higher sensitivity to rates
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