Las Paletas Corporation has two different bonds currently outstanding. Bond M ha
ID: 2641699 • Letter: L
Question
Las Paletas Corporation has two different bonds currently outstanding. Bond M has a face value of $50,000 and matures in 20 years. The bond makes no payments for the first six years, then pays $1,600 every six months over the subsequent eight years, and finally pays $1,900 every six months over the last six years. Bond N also has a face value of $50,000 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 10 percent compounded semiannually.
What is the current price of bond M and bond N?
Explanation / Answer
Las Paletas Corporation has two different bonds currently outstanding. Bond M has a face value of $50,000 and matures in 20 years. The bond makes no payments for the first six years, then pays $1,600 every six months over the subsequent eight years, and finally pays $1,900 every six months over the last six years. Bond N also has a face value of $50,000 and a maturity of 20 years; it makes no coupon payments over the life of the bond. The required return on both these bonds is 10 percent compounded semiannually.
What is the current price of bond M and bond N?
Step 1 :
Price of bond M at year 14 = pv(rate,nper,pmt,fv)
Price of bond M at year 14 =pv(5%,12,1900,50000)
Price of bond M at year 14 =$ 44,682.05
Step 2 :
Price of bond M at year 6 =pv(rate,nper,pmt,fv)
Price of bond M at year 6 = pv(5%,16,1600,44682.05)
Price of bond M at year 6 = $ 37,809.79
Step 3 :
Current price of bond M = 37809.79/(1+10%/2)^(6*2)
Current price of bond M = $ 21,053.91
Current price of bond N = 50000/(1+10%/2)^(20*2)
current price of bond N = $ 7102.28
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