The Morgan Corporation has two different bonds currently outstanding. Bond M has
ID: 2631185 • Letter: T
Question
The Morgan Corporation has two different bonds currently outstanding. Bond M has a face value of $29,500 and matures in 21 years. The bond makes no payments for the first 6 years, then pays $1,800 every six months over the subsequent 9 years, and finally pays $2,300 every six months over the last 6 years. Bond N also has a face value of $29,500 and a maturity of 21 years; it makes no coupon payments over the life of the bond. The required return on both these bonds is 12 percent compounded semiannually.
Required: (a) What is the current price of Bond M? (Do not include the dollar sign ($). Round your answer to 2 decimal places. (e.g., 32.16))
(b) What is the current price of Bond N? (Do not include the dollar sign ($). Round your answer to 2 decimal places. (e.g., 32.16))
Explanation / Answer
(a) What is the current price of Bond M? (Do not include the dollar sign ($). Round your answer to 2 decimal places. (e.g., 32.16))
Price of Bond M at year 15 = pv(6%,12,2300,29500)
Price of Bond M at year 15 = $ 33,943.44
Price of Bond M at year 6 = pv(6%,18,1800,33943.44)
Price of Bond M at year 6 = $ 31,381.56
Current price of Bond M = 31381.56/1.06^12
Current price of Bond M = $ 15,595.67
(b) What is the current price of Bond N? (Do not include the dollar sign ($). Round your answer to 2 decimal places. (e.g., 32.16))
Current price of Bond N = 29500/1.06^42
Current price of Bond N = $ 2552.56