Miller Corporation has a premium bond making semiannual payments. The bond has a
ID: 2727378 • Letter: M
Question
Miller Corporation has a premium bond making semiannual payments. The bond has a coupon rate of 8 percent, a YTM of 6 percent, and 12 years to maturity. The Modigliani Company has a discount bond making semiannual payments. This bond has a coupon rate of 6 percent, a YTM of 8 percent, and also has 12 years to maturity. What is the price of each bond today? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32. 16).) If interest rates remain unchanged, what do you expect the price of the bonds to be 1 year from now? In 3 years? In 7 years? In 11 years? In 12 years? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32. 16).)Explanation / Answer
The price of the Miller bond is given by PV function in excel as in =pv(rate,nper,pmt,fv) where rate rate = 0.06/2, nper = 12*2 = 24, pmt = 8% of 1000 = 80 and semiannual = 40, fv =1000
The Price of Miller bond = PV(0.06/2,24,40,1000) = $1,169.36
The Price of Modigilani bond = PV(0.08/2,24,30,1000) = $847.53
The price of the bond as per the number of years is as hown in the table:
Price of the bond in Miller Bond Modigilani Bond 1 year $ 1,159.37 $ 855.49 3 years $ 1,137.54 $ 873.41 7 years $ 1,085.30 $ 918.89 11 years $ 1,019.13 $ 981.14 12 years $ 1,000.00 $ 1,000.00