Las Paletas Corporation has two different bonds currently outstanding. Bond M ha
ID: 2660723 • Letter: L
Question
Las Paletas Corporation has two different bonds currently outstanding. Bond M has a face value of $10,000 and matures in 20 years. The bond makes no payments for the first six years, then pays $1,200 every six months over the subsequent eight years and finally pays $1,500 every six months over the last six years. Bond N also has a face value of $10,000 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 6% compounded semiannually.
Explanation / Answer
Price of bond is the Present value of all cash flows including redemption
According to the cash flows of coupons there are 2 annuities of 8 and
6 years for bond M:-
taking time period semiannually instead annually
PV = 1100*V^12 * a16 +1400* V^28 * a12 + 20000*V40 @6% semiannually
1100*1.06^12 * (1-1.06^-16)/.06 +1400* 1.06^28 * (1-1.06^-12)/.06 +
20000*1.06^40
= 9765.18
for bond N there are no coupons so :-
PV = 20000 * 1.06^40 @ 6% semiannually
= 1944.44
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