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

Answer:

The right solution is "$20.733.16".

Explanation:

According to the question,

Face value,

= $20000

Rate (r),

= .035

Bond A:

= $\frac{Face \ value}{(1+r)^n}$

= $\frac{20000}{(1+.035)^{40}}$

= $5051.45$ ($)

Bond B:

= $\frac{1100\times 12.0941}{(1+.035)^{10}} + \frac{1400\times 10.9205}{(1+.035)^{26}} + \frac{20000}{(1+.035)^{40}}$

= $9431.11+6250.6+5051.45$

= $20733.16$ ($)