Question

The Frush Corporation has two different bonds currently outstanding. Bond M has a face value of $20,000 and matures in 20 years. The bond makes no payments for the first six years, then pays $2,300 every six months over the subsequent eight years, and finally pays $2,600 every six months over the last six years. Bond N also has a face value of $20,000 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? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Current price

Bond M $

Bond N $

Answer 1

For Bond N

Future Value=$20000

Tenure (nper)=20 year

Rate= (1+12%/2)^2-1=12.36% p.a.

So, the Present Value of the Bond N=20000/(1+12.36%)^20= $1944.44

Price of Bond N= $1944.44

For Bond M

For the First 6 Year Cash flow=0

For next 8 year , every 6 month cash flow (PMT)=2300, rate=12/2% or 6% for every 6 month, total period= 8*2=16

So, Value of these 8 years cash flow at year 8= $23243.56.Calculation given below:

Value of $23243 at year 0= 23243/(1+12.36%)^8=$9149.52

For next 6 year, every 6 month cash flow(PMT)=2600, rate=6% for every 6 month, total period=6*2=12

Value of last 6 year's cash flow at year 14=21798

Value of last 6 year's cash flow at year 0=21798/(1+12.36%)^14=4264.346

So, Value of Bond M= PV of first 6 year cash flow+PV of next 8 year's cash flow+PV value of last 6 year cash flow=0+9149.52+4264.346=13413.866

So, Price of Bond M= $13413.86