The Smith Company has two different bonds currently outstanding .Bond A has a fa

Question

The Smith Company has two different bonds currently outstanding .Bond A has a face value of $30,000 and matures in 20 years. The bond makes no payments for the first six years, then pays $800 every six months over the subsequent eight years, and finally pays $1000 every six months. Bond B 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 .If the required return on both these bonds is 8 percent compounded semiannually, what should be the current price of Bond A? Of Bond B?

Explanation / Answer

HI,

Please find the detailed answer as follows:

Price of Bond A = 800/(1+8%/2)^13 + 800/(1+8%/2)^14 + 800/(1+8%/2)^15 + 800/(1+8%/2)^16 + 800/(1+8%/2)^17 + 800/(1+8%/2)^18 + 800/(1+8%/2)^19 + 800/(1+8%/2)^20 + 800/(1+8%/2)^21 + 800/(1+8%/2)^22+ 800/(1+8%/2)^23 + 800/(1+8%/2)^24 + 1000/(1+8%/2)^25 + 1000/(1+8%/2)^26 + 1000/(1+8%/2)^27 + 1000/(1+8%/2)^28 + 1000/(1+8%/2)^29 + 1000/(1+8%/2)^30 + 1000/(1+8%/2)^31 + 1000/(1+8%/2)^32 + 1000/(1+8%/2)^33 + 1000/(1+8%/2)^34 + 1000/(1+8%/2)^35 + 1000/(1+8%/2)^36 + 1000/(1+8%/2)^37 + 1000/(1+8%/2)^38 + 1000/(1+8%/2)^39 + 1000/(1+8%/2)^40 + 30000/(1+8%/2)^40 = $15483.99 or $15484

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Price of Bond B = 30000/(1+8%/2)^40 = $6248.67

Thanks.

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