Answer:
Company Price of Bond
Miller Corporation $1,218.32
Modigliani Company $810.92
Explanation:
<em>The value of the bond is the present value (PV) of the future cash receipts expected from the bond. The value is equal to present values of interest payment plus the redemption value (RV). </em>
Value of Bond = PV of interest + PV of RV
The value of bond Miller Corporation can be worked out as follows:
Step 1
PV of interest payments
Semi annul interest payment = 8%× 1000× 1/2 =40
Semi-annual yield = 6%/2 = 3% per six months
Total period to maturity (in months) = (2 × 18) = 36 periods
PV of interest =
40× (1- (1+0.03^(-36)/0.03)= 873.29
Step 2
PV of Redemption Value
= 1,000 × (1.03)^(-36) =345.03
Step 3:
Price of bond
= 873.29 + 345.03= $1,218.32
Modigliani Company
Step 1
PV of interest payments
Semi annul interest payment = 6%× 1000× 1/2 =30
Semi-annual yield = 8%/2 = 4% per six months
Total period to maturity (in months) = (2 × 18) = 36 periods
PV of interest =
30× (1- (1+0.04^(-36)/0.04)= 567.25
Step 2
PV of Redemption Value
= 1,000 × (1.03)^(-36) =243.66
Step 3:
Price of bond
= 567.2484586 + 243.66 = $810.92
Price of bond = $810.92
