The Morgan Corporation has two different bonds currently outstanding. Bond M has a face value of $20,000 and matures in exactly 20 years. Looking forward, this bond makes no interest payments for the next six years. Beginning in the middle of year seven, the bond makes payments of $800 every six months through the end of year 14. Finally, beginning in the middle of year 15, the bond makes semiannual payments of $1000 up to and including its maturity date.

Required:
What are the current prices of bond M and bond N?

Bond N also has a face value of $20,000 and a maturity of 20 years; it makes no coupon payments over the life of the bond. The required return on both these bonds is 6.5 percent compounded semiannually,

we must first calculate the effective interest rate:

the effective interest rate = 1.065 = (1 + r)²

√1.065 = √(1 + r)²

1.03199 = 1 + r

r = 3.2%

I used an excel spreadsheet to calculate the present value of bond M's coupon payments.

Bond M's price:

PV of face value = $20,000 / (1.032)⁴⁰ = $5,673.38

PV of coupon payments = $10,853.69

market price = $16,527.07

to determine the market value of bond N (zero coupon bond) we can use the following formula:

market value = future value / (1 + r)ⁿ

market value = $20,000 / (1.032)⁴⁰ = $5,673.38