Question

Las Paletas Corporation has two different bonds currently outstanding. Bond M has a face value of $30,000 and matures in 20 years. The bond makes no payments for the first six years, then pays $3,100 every six months over the subsequent eight years, and finally pays $3,400 every six months over the last six years. Bond N also has a face value of $30,000 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 12 percent compounded semiannually. What is the current price of bond M and bond N?

Answer 1

Calculation of Price of Bond M
Period	PVF @ 6%	Payment	PV
1	0.943396	0	0.00
2	0.889996	0	0.00
3	0.839619	0	0.00
4	0.792094	0	0.00
5	0.747258	0	0.00
6	0.704961	0	0.00
7	0.665057	0	0.00
8	0.627412	0	0.00
9	0.591898	0	0.00
10	0.558395	0	0.00
11	0.526788	0	0.00
12	0.496969	0	0.00
13	0.468839	3100	1453.40
14	0.442301	3100	1371.13
15	0.417265	3100	1293.52
16	0.393646	3100	1220.30
17	0.371364	3100	1151.23
18	0.350344	3100	1086.07
19	0.330513	3100	1024.59
20	0.311805	3100	966.59
21	0.294155	3100	911.88
22	0.277505	3100	860.27
23	0.261797	3100	811.57
24	0.246979	3100	765.63
25	0.232999	3100	722.30
26	0.21981	3100	681.41
27	0.207368	3100	642.84
28	0.19563	3100	606.45
29	0.184557	3400	627.49
30	0.17411	3400	591.97
31	0.164255	3400	558.47
32	0.154957	3400	526.86
33	0.146186	3400	497.03
34	0.137912	3400	468.90
35	0.130105	3400	442.36
36	0.122741	3400	417.32
37	0.115793	3400	393.70
38	0.109239	3400	371.41
39	0.103056	3400	350.39
40	0.097222	33400	3247.22
		Price	24062.31

Price of Bond N = F.V. * PVF(6%, 40 Periods) = $30000 * 0.097222 = $2916.67