Trying to solve the following question, but I am a bit stuck.
The 2IFM1 Corporation has two different bonds currently outstanding. Bond M has a face value of $\$20,000$ and matures in $20$ years. The bond makes no payments for the first $5$ years, then pays $\$1,200$ over the subsequent $8$ years and finally pays $\$1,500$ over the last $7$ years.
If the required return on both bonds is $6\%$, what is the current price for bond M? Anyone knows how?
On
The distinction between bond M and N is blur! Anyway, this is a very elementary valuation question.
Say after T years, you will get paid - S units of money. Then the present value would be,
$\frac {S}{(1+r)^T}$. Where $r$ is your rate of interest rate. I have assumed that the interest rate is flat with time (term structure is flat). If it is not the case, then you have to use the term structure, and it would be little tedious. But in your case the term structure seems to be flat. Use the above formula for all future payments, calculate the total present value and you are done!
Answer:
Bond Price = P = $$\frac{1200}{1.06^6}+\frac{1200}{1.06^7}+\cdots+\frac{1200}{1.06^{13}}+\frac{1500}{1.06^{14}}+\frac{1500}{1.06^{15}}+\cdots+\frac{21500}{1.06^{20}} = 15731$$
Thanks
Satish