The Richmond Corporation has two different bonds currently outstanding. Bond M h

Question

The Richmond Corporation has two different bonds currently outstanding. Bond M has a face value of $21,000 and matures in 16 years. The bond makes no payments for the first 6 years, then pays $1,500 every six months over the subsequent 4 years, and finally pays $2,000 every six months over the last 6 years. Bond N also has a face value of $21,000 and a maturity of 16 years; it makes no coupon payments over the life of the bond. If the required return on both these bonds is 11 percent compounded semiannually, the current price of Bond M is $__________, and the current price of Bond N is $____________.

Explanation / Answer

current price of Bond M =$1,500/(1+11%/2)^13 + $1,500/(1+11%/2)^14 ..... $1,500/(1+11%/2)^20 + $2000/(1+11%/2)^21 + $2000/(1+11%/2)^22 .... ($21,000+ $2000)/(1+11%/2)^32 =$14,691.08 current price of Bond N = $21,000/(1+5.5%)^32 =3785.65

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