Las Paletas Corporation has two different bonds currently outstanding. Bond M ha
ID: 2695853 • Letter: L
Question
Las Paletas Corporation has two different bonds currently outstanding. Bond M has a face value of $30,000 and matures in 20 years. The bond makes no payments for the first six years, then pays $1,900 every six months over the subsequent eight years, and finally pays $2,200 every six months over the last six years. Bond N also has a face value of $30,000 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 12 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 $30,000 and matures in 20 years. The bond makes no payments for the first six years, then pays $1,900 every six months over the subsequent eight years, and finally pays $2,200 every six months over the last six years. Bond N also has a face value of $30,000 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 12 percent compounded semiannually.
Explanation / Answer
Current Price of Bond M = [1900PVIFA (6%,16)]/1.06^12 +[2200PVIFA (6%,12)]/1.06^28 + 30000/1.06^40
=16169.43/1.06^12 + 18444.46/1.06^28 + 30000/1.06^40
= $14560.67
Current Price of Bond N= 30000/1.06^40 = $2916.67
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