Jallouk Corporation has two different bonds currently outstanding. Bond M has a

Question

Jallouk Corporation has two different bonds currently outstanding. Bond M has a face value of $40,000 and matures in 20 years. The bond makes no payments for the first six years, then pays $2,000 every six months over the subsequent eight years, and finally pays $2,300 every six months over the last six years. Bond N also has a face value of $40,000 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? (round your answer 2 decimal places)

Explanation / Answer

The price of any financial instrument (bond) is the present value of future cash flows. The bond M make different coupon payments.

For find the price of the bond we have to find the present value of the cash flow.

So, the Present Value of the cash flow of bond M is as follow….

i= 8% /2 = 4% Semiannually

PV (Bond M) =$2,000 (PVIFA4%, 16) (PVIF4%, 12) + $2300(PVIFA4%, 12) (PVIF4%, 28) + $40,000 (PVIF4%, 40)

PV (Bond M) =$2,000* 11.6523* 0.6246+ $2,300* 9.3851* 0.3335 + $40,000*0.2083

PV (Bond M) =$30,086.90

Current price of Bond M is $30,086.90

Note that for the coupon payment of $2,000, we calculate the PVA for the coupon payment and then discount the lump-sum back today.

The par value of Bond N is $40,000 (Zero Coupon Bond).

So, the price of the bond N is the present value of the par or……

PV (Bond N) = $20,000 (PVIF4%, 40)

PV (Bond N) = $40,000*0.2083

PV (Bond N) = $8,332

Current price of Bond M is $8,332

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