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The Morgan 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 $800 every six months over the subsequent eight years, and finally pays $1,000 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. If the required return on both these bonds is 8 percent compounded semiannually, what is the current price of Bond M? of Bond N?

Respuesta :

Answer:

a. Current value of Bond M = $5,066.47

b. Current value of Bond N = $1,380.93

Explanation:

a. Calculation of current price of Bond M

Note: See the attached excel file for the calculation of the total present of value of the coupon payment of Bond M.

From the attached excel file, we have:

Total present of value of the coupon payment of Bond M = $3,685.54

Present value of the face value of Bond M = Face value / (100% + Required return)^(Number of years to maturity * Number of years in a year) = $30,000 / (100% + 8%)^(20 * 2) = $1,380.93

Current value of Bond M = Total present of value of the coupon payment of Bond M + Present value of the face value of Bond M = $3,685.54 + $1,380.93 = $5,066.47

b. Calculation of current price of Bond N

Since no coupon payments is made over the life of Bond N, we have:

Current value of Bond N = Present value of the face value of Bond N = Face value / (100% + Required return)^(Number of years to maturity * Number of years in a year) = $30,000 / (100% + 8%)^(20 * 2) = $1,380.93

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