Question

In: Finance

You are called in as a financial analyst to appraise the bonds of Olsen’s Clothing Stores....

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 14 percent annual interest. There are 20 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. a. Compute the price of the bonds based on semiannual analysis. b. With 15 years to maturity, if yield to maturity goes down substantially to 10 percent, what will be the new price of the bonds?

Solutions

Expert Solution

(a)-The price of the bond with 20 years to maturity

The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the face Value

Face Value of the Bond = $1,000

Semi-annual Coupon Amount = $60 [$1,000 x 12% x ½]

Semi-annual Yield to Maturity = 7% [14% x ½]

Maturity Period = 40 Years [20 Years x 2]

The Price of the Bond = Present Value of the Coupon Payments + Present Value of the face Value

= $60[PVIFA 7%, 40 Years] + $1,000[PVIF 7%, 40 Years]

= [$60 x 13.33171] + [$1,000 x 0.06678]

= $799.90 + $66.78

= $866.68

(b)-The price of the bond with 15 years to maturity and yield to maturity of 10%

The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the face Value

Face Value of the Bond = $1,000

Semi-annual Coupon Amount = $60 [$1,000 x 12% x ½]

Semi-annual Yield to Maturity = 5% [10% x ½]

Maturity Period = 30 Years [15 Years x 2]

The Price of the Bond = Present Value of the Coupon Payments + Present Value of the face Value

= $60[PVIFA 5%, 30 Years] + $1,000[PVIF 5%, 30 Years]

= [$60 x 15.37245] + [$1,000 x 0.23138]

= $922.34 + $231.38

= $1,153.72

NOTE

-The formula for calculating the Present Value Annuity Inflow Factor (PVIFA) is [{1 - (1 / (1 + r)n} / r], where “r” is the Yield to Maturity of the Bond and “n” is the number of maturity periods of the Bond.

-The formula for calculating the Present Value Inflow Factor (PVIF) is [1 / (1 + r)n], where “r” is the Yield to Maturity of the Bond and “n” is the number of maturity periods of the Bond.

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

You are called in as a financial analyst to appraise the bonds of Olsen’s Clothing Stores....
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 11 percent, which is paid semiannually. The yield to maturity on the bonds is 14 percent annual interest. There are 15 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. a. Compute the price of the...
You are called in as a financial analyst to appraise the bonds of Olsen’s Clothing Stores....
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 8 percent, which is paid semiannually. The yield to maturity on the bonds is 10 percent annual interest. There are 20 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. a. Compute the price of the...
You are called in as a financial analyst to appraise the bonds of Olsen’s Clothing Stores....
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 10 percent, which is paid semiannually. The yield to maturity on the bonds is 12 percent annual interest. There are 25 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. a. Compute the price of the...
You are called in as a financial analyst to appraise the bonds of Olsen’s Clothing Stores....
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...
You are called in as a financial analyst to appraise the bonds of Olsen’s Clothing Stores....
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. a. Compute the price of the...
You are called in as a financial analyst to appraise the bonds of Merck & Company,...
You are called in as a financial analyst to appraise the bonds of Merck & Company, Inc. The $1,000 par value bonds have a quoted annual interest rate of 5.4%, which is paid semiannually. The yield to maturity on the bonds is 6.4% annual interest. There are 25 years to maturity Compute the price of the bonds based on semiannual analysis.
You are called in as a financial analyst to appraise the bonds of Merck & Company,...
You are called in as a financial analyst to appraise the bonds of Merck & Company, Inc. The $1,000 par value bonds have a quoted annual interest rate of 8%, which is paid semiannually. The required interest rate on the bonds is 6% annual interest. There are 20 years to maturity a. Compute the bond’s value based on semiannual analysis. b. Suppose that two years after the bonds were issued (see part a), the required interest rate fell from 6%...
1. You are a financial analyst for an intenational firm that deals in bonds. There are...
1. You are a financial analyst for an intenational firm that deals in bonds. There are two bonds been offered: ADANSI EAST bond and ENERGY bond. ADANSI EAST is a tax free bond and ENERGY is taxable bond. The firm is interested in buying one of the bonds and you are being asked to explain the impact of tax free and tax statuses of the bonds on the price and interest rates of the two bonds using appropriate graphs.
You have just been hired as a financial analyst for a company called Basel Industries. Unfortunately,...
You have just been hired as a financial analyst for a company called Basel Industries. Unfortunately, company headquarters (where all of the firm’s records are kept) have been destroyed by fire. So, your first job will be to recreate the firm’s cash flow statement for the year that has just ended. The firm had $100,000 in the bank at the end of the prior year. In addition, its net working capital accounts, except cash, remained constant during the year.   The...
As you know, stocks and bonds are "pieces" of paper called "financial" asset as opposed to...
As you know, stocks and bonds are "pieces" of paper called "financial" asset as opposed to "real" asset such as a piece of land or a building or a car. What gives these "pieces" of paper their value? For example, Google shares cost $1,193 per share currently. Why do investors pay such a high price for the piece of paper sold by Google?
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT