Question

Problem 7-34 Valuing Bonds [LO2]

Jallouk 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.)

Answer 1

1: Price of Bond M = Present value of future cash flows

Required rate = 12%/2 = 6% per semiannual period

PV of $2300 for 8 years at time 6 year/12 semiannual period = [A*(1-1/(1+r)^n)/r ]

= 2300*(1-1/1.06^16)/0.06

=23243.56

PV of 2600 for 6 years at time 14/ 28 semiannual period = [A*(1-1/(1+r)^n)/r ]

= 2600*(1-1/1.06^12)/0.06

=21797.99

Price of the bond M = 23243.56/1.06^12 + 21797.99/1.06^28 + 20000/1.06^40

=$17760.12

Price of Bond N= 20000/1.06^40 = $ 1944.44