Question

Jallouk Corporation has two different bonds currently outstanding. Bond M has a face value of $10,000 and matures in 20 years. The bond makes no payments for the first six years, then pays $1,700 every six months over the subsequent eight years, and finally pays $2,000 every six months over the last six years. Bond N also has a face value of $10,000 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

	Jallouk Corporation
	Required rate of Return on Bonds =8% compounded semi annually =4% semi annually
	Bond M
	Finding the PV after 8 years of $1700 interest paymnets for 16 times
	PVIF Factor for 16 periods @4% =(1-1.04^-16)/4%	11.65230
	PV after 8 years for $1700 semi annual payments for 8 years=1700*11.65230=		$          19,808.90
a	PV of the Interest paymnets today (before 6 years or 12 semi annual periods)=19808.9/1.04^12=		$          12,372.58
	PVIF Factor for 12 periods @4% =(1-1.04^-12)/4%=	9.38507
	PV after 14 years for $2000 semi annual interest for 12 periods =2000*9.38507=	18,770.15
b	PV of the interest payments today(14 years or 28 semi annual periods earlier)=18770.15/1.04^28=		6,259.42
	PV factor @4% for 40 periods =1/1.04^40=	0.20829
c	PV of $10,000 receivable after 20 years(40 semi annual periods )=0.20829*10000=	2,082.89
d	PV of Interests and Maturity value today =a+b+c=Bond Price today =	$           20,714.89
	So Price of Bond M today =$20,714.89
	Price of Bond N
	PV factor @4% for 40 periods =1/1.04^40=	0.20829
	PV of $10,000 receivable after 20 years(40 semi annual periods )=0.20829*10000=	2,082.89
	So Price of Bond N =$2,082.89