Question

Jallouk Corporation has two different bonds currently outstanding. Bond M has a face value of $80,000 and matures in 20 years. The bond makes no payments for the first six years, then pays $2,900 every six months over the subsequent eight years, and finally pays $3,200 every six months over the last six years. Bond N also has a face value of $80,000 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?

Answer 1

Answer:

Bond M is $ 27,590.93  

Bond N is   $ 7,777.78  

Explanation:

A rational investor would only pay for the two bonds the present values of the future cash flows that the bonds would pay.

The future cash flows are discounted using the required rate of return of 12% as in the attached spreadsheet.