The Mallory Corporation has two different bonds currently out standing. Bond M h

Question

The Mallory Corporation has two different bonds currently out standing. 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 $1200 every six months over the subsequent eight years, and finally pays $1,500 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. If the required return on both these bonds is 10 percent compounded semiannually, what is the current price of Bond M? Of Bond N?

Explanation / Answer

10%/2

20 * 2

Bond M Bond N Face Value $20,000 $20,000 Number of years toMaturity 20 years 20 years Required Return(YTM) (Compounded Semiannually) 10% 10% Calcualting Present Value ofthe Bond M: Present Value of theBond M = $1,200 (PVIFA5%, 16)(PVIF5%,12) + $1,500 (PVIFA5%,12)(PVIF5%,28) + $20,000 (PVIF5%,40) Present Value of theBond M = ($1,200 * 10.8378 * 0.4581) + ($1,500* 8.8633 * 0.2551) + ($20,000 * 0.1420)   Present Value of theBond M = $5,957.75 + $3,391.54 + $2,840 Present Value (or)Current Price of the Bond M = $12,189.29 Calculating Present Value fothe Bond N: (Using Ms-Excel "PV"Function): Interest Rate (Rate)

10%/2

Number of Periods

20 * 2

Annual Coupon Payment(PMT) $0 Future Value of the Bond(FV) -$20,000 Present Value (or) CurrentPrice of the Bond $2,840.91

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