Question 2 Lofthaven has two bonds outstanding, Series E and Series F Both bonds

Question

Question 2 Lofthaven has two bonds outstanding, Series E and Series F Both bonds have face values of $10,000 and, because both bonds are backed by Lofthaven, share a . The Series E is a zero coupon bond with a maturity in 6 years. The Series C, also maturing in 6 years, is a hybridized discount bond that pays no coupon for the first two years; then pays $500 every six months for three years; and finally makes two $800 payments in the last year. A. What is the current price of a Series E bond? (Hint: The convention for zero-coupon bonds is to calculate the return on a semi-annual basis.) B. What is the current price of a Series F bond? (Hint: Even if you utilize formulas to solve this, you should lay out and discount the stream of cash flows as a check on your work.) Series E YTM 6.25% Issuance 6/1/2016 Maturity 6/1/2022 Term 6 years Face $10,000 Coupon/yr 2 Coupon 0% Series Series F YTM 6.25% Issuance 6/1/2016 Maturity 6/1/2022 Term 6 years Face $10,000 Coupons/yr 2 Begins Year Coupon 1 0% 0 Coupon 2 10% 3 Coupon 3 16% 5

Explanation / Answer

value of E series zero coupon bond =10,000(1+.03125)-12 (half yearly rate =6.25/2 and periods 6*2)

=6912

value of F bond =500*PVF(3.125% for period n 5,6,7,8,9,10)+800*PVF(3.125 n 11,12)+10000*PVF3.125,n12

   =500*4.77+800*1.303+10,000*.670

=2,385+1042+6700

   =10,127

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