Question

You are called in as a financial analyst to appraise the bonds of Olsen’s Clothing Stores. The $1,000 par value bonds have a quoted annual interest rate of 12 percent, which is paid semiannually. The yield to maturity on the bonds is 12 percent annual interest. There are 10 years to maturity. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.  

Compute the price of the bonds based on semiannual analysis. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

Bond price $

b.	With 5 years to maturity, if yield to maturity goes down substantially to 8 percent, what will be the new price of the bonds? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

Answer 1

(a)-Price of the Bond

The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the Face Value/Par Value.

The Price of the Bond is normally calculated either by using EXCEL Functions or by using Financial Calculator.

Here, the calculation of the Bond Price using financial calculator is as follows

Variables	Financial Calculator Keys	Figures
Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$1,000 x 12.00% x ½]	PMT	60
Market Interest Rate or Yield to maturity on the Bond [12.00% x ½]	1/Y	6
Maturity Period/Time to Maturity [10 Years x 2]	N	20
Bond Price	PV	?

Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond (PV) = $1,000.00

“Hence, the price of the bonds will be $1,000.00”

If the Coupon rate of the Bond (12.00%) is equal to the Yield to maturity of the Bond (12.00%) of the Bond, then the Price of the bond will be equal to the Par Value of the Bond ($1,000)

(b)-The new price of the Bond with 5 years to maturity, if yield to maturity goes down to 8 percent

Variables	Financial Calculator Keys	Figures
Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$1,000 x 12.00% x ½]	PMT	60
Market Interest Rate or Yield to maturity on the Bond [8.00% x ½]	1/Y	4
Maturity Period/Time to Maturity [5 Years x 2]	N	10
Bond Price	PV	?

Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond (PV) = $1,162.22.

“Hence, the new price of the bonds will be $1,162.22”