Question

The Change Corporation has two different bonds currently outstanding. Bond M has a face value of $40,000 and matures in 20 years. The bond makes no payments for the first six years, then pays $2,000 every six months over the subsequent eight years, and finally pays $2,300 every six months over the last six years. Bond N also has a face value of $40,000 and a maturity of 20 years; it makes no coupon payments over the life of the bond. The required return on both these bonds is 8 percent compounded semiannually.

What is the current price of Bond M and Bond N? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Answer 1

1.

Price of bond M = (2000/(1+8%/2)^13 x (1-1/(1+8%/2)^(2 x 8))/(1-1/(1+8%/2))) + (2300/(1+8%/2)^29 x (1-1/(1+8%/2)^(2 x 6))/(1-1/(1+8%/2))) + (40000/(1+8%/2)^40)
= $14,555.97892 + $7,198.33453 + $8,331.56179
= $30,085.88

2.

Price of bond N = 40000/(1+8%/2)^40
= $8,331.56