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 $10,000 and matures in 20 years. The bond makes no payments for the first six years, then pays $2,200 every six months over the subsequent eight years, and finally pays $2,500 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 10 percent compounded semiannually.

What is the current price of bond M and bond N?

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 $2,200 every six months over the subsequent eight years, and finally pays $2,500 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 10 percent compounded semiannually.

Explanation / Answer

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----------12,500-------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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