Las Paletas Corporation has two different bonds currently outstanding. Bond M ha
ID: 2705877 • Letter: L
Question
Las Paletas Corporation has two different bonds currently outstanding. Bond M has a face value of $20,000 and matures in 20 years. The bond makes no payments for the first six years, then pays $1,100 every six months over the subsequent eight years, and finally pays $1,400 every six months over the last six years. Bond N also has a face value of $20,000 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 percent compounded semiannually.
What is the current price of bond M and bond N?
i found a way to do this, but not really time effective. Is it possible to solve it with a Fin calc?
Las Paletas Corporation has two different bonds currently outstanding. Bond M has a face value of $20,000 and matures in 20 years. The bond makes no payments for the first six years, then pays $1,100 every six months over the subsequent eight years, and finally pays $1,400 every six months over the last six years. Bond N also has a face value of $20,000 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 percent compounded semiannually.
Explanation / Answer
The price of any bond (or financial instrument) is the PV of the future cash flows. Even though Bond M makes different coupons payments, to find the price of the bond, we just find the PV of the cash flows. The PV of the cash flows for Bond M is:
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PM?= $1,100(PVIFA3.5%,16)(PVIF3.5%,12) + $1,400(PVIFA3.5%,12)(PVIF3.5%,28) + $20,000(PVIF3.5%,40)
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PM?= $19,018.78
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?Notice that for the coupon payments of $1,400, we found the PVA for the coupon payments, and then discounted the lump sum back to today.
?Bond N is a zero coupon bond with a $20,000 par value, therefore, the price of the bond is the PV of the par,
?PN?= $20,000(PVIF3.5%,40) = $5,051.45
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