The Morgan Corporation has two different bonds currently outstanding. Bond M has

Question

The Morgan Corporation has two different bonds currently outstanding. Bond M has a face value of $27,500 and matures in 17 years. The bond makes no payments for the first 7 years, then pays $1,400 every six months over the subsequent 3 years, and finally pays $1,800 every six months over the last 7 years. Bond N also has a face value of $27,500 and a maturity of 17 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 Bonds M and N is $______ and $_________

Explanation / Answer

Hi,

Please find the answer as follows:

Rate = 11/2 = 5.5%

Price of Bond M = 1400/(1+.055)^15 + 1400/(1+.055)^16 + 1400/(1+.055)^17 + 1400/(1+.055)^18 + 1400/(1+.055)^19 + 1400/(1+.055)^20 + 1800/(1+.055)^21 + 1800/(1+.055)^22 + 1800/(1+.055)^23 + 1800/(1+.055)^24 + 1800/(1+.055)^25 + 1800/(1+.055)^26 + 1800/(1+.055)^27 + 1800/(1+.055)^28 + 1800/(1+.055)^29 + 1800/(1+.055)^30 + 1800/(1+.055)^31 + 1800/(1+.055)^32 + 1800/(1+.055)^33 + 1800/(1+.055)^34 + 27500/(1+.055)^34 = 13674.99 or 13675

Price of Bond N = 27500/(1+.055)^34 = 4453.99

Thanks.

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