Las Paletas Corporation has two different bonds currently outstanding. Bond M ha

Question

Las Paletas 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 $2,500 every six months over the subsequent eight years, and finally pays $2,800 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 answers to 2 decimal places. (e.g., 32.16))

Las Paletas 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 $2,500 every six months over the subsequent eight years, and finally pays $2,800 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.

Explanation / Answer

ond M?

Use the irregular cash flow function in your financial calculator to value this

bond:

Dates Payment Frequency

1-12 0 12

11-28 2,000 16

29-39 2,500 11

40 42,500 1

There are several points to note about these entries.

First, the periods are 6-month intervals because of the semiannual payments.

Second, it is important to put in the 12 periods without payments; otherwise, your financial calculator

won

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