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Elson co, needs to raise debt and for this purpose issued two different bonds, Bond A and Bond B. Both bonds have 20 years to maturity with a face value of $20000. Bond A will make no coupon payment over the entire life, however Bond B is a semiannual coupon bond. It will make first coupon payment of $1100 at sixth year semiannually for the next 8 years. After that it will make coupon payment of $1400 for the rest of its remaining life. Find the price of Bond A and B if the required rate of return on these bonds is 7 percent compounded semiannually.

User Dkarp
by
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1 Answer

3 votes

Answer:

The right solution is "$20.733.16".

Step-by-step explanation:

According to the question,

Face value,

= $20000

Rate (r),

= .035

Bond A:

=
(Face \ value)/((1+r)^n)

=
(20000)/((1+.035)^(40))

=
5051.45 ($)

Bond B:

=
(1100* 12.0941)/((1+.035)^(10)) + (1400* 10.9205)/((1+.035)^(26)) + (20000)/((1+.035)^(40))

=
9431.11+6250.6+5051.45

=
20733.16 ($)

User Hans Tiono
by
7.0k points