Question

The Frush 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 $1,400 every six months over the subsequent eight years, and finally pays $1,700 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 10 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.)

Bond N= $4261.36

Answer 1

The Frush Corporation
The price of any bond ( or financial instrument) is the PV of the future cash flows.
Even though bond M makes different coupons payments, to find the price of the
bond, we just find the PV of the cash flows. The PV of the cash flows for bond M is:
PM = $1400(PVIFA5%,16)(PVIF5%,12) + $1700(PVIFA5%,12)(PVIF5%,28) + $30,000 (PVIF5%,40)
PM = $ 16,553.39
Notice that for the coupon payments of $1400, we found the PVA for the coupon
payments, and then discounted the lump sum back today.
Bond N is a zero coupon bond with a $30,000 par value; therefore, the price of the
bond is the PV of the par, or:
PN = $30,000 (PVIF5%,40) = $4,261.36