Question

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.

Answer 1

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` ($)