The Morgan Corporation has two different bonds currently outstanding. Bond M has
ID: 2739792 • Letter: T
Question
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 $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? (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))
Please be as clear as possible with the steps-thank you!
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 $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
Calculation of the current price of bond M and N:
The present value of the Bond M:
PM = $1,900 (1/(1+0.06)12) + $1,000 (1/(1+0.06)28 ) + $30,000/(1+0.06)40
= $1900 (8.38384) + $2,200 (13.4062) +$30,000/10.2857
= $15,929.30 +$29,493.64 + $2,924.35
PM = $48,347.29
The present value of the Bond M:
Par value of Bond N is $30,000
PN = $30,000 / (1+0.06)40
PN = $2,916.67
Therefore, current price of the bond M is $48,347.29 and Bond N is $2,916.67.