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

b. With 15 years to maturity, if yield to maturity goes down substantially to 6 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.Information provided:

Par value= future value= $1,000

Time= 20 years*2= 40 semi-annual periods

Coupon rate= 8%/2= 4%

Coupon payment= 0.04*1,000= $40

Yield to maturity= 10%/2= 5%

The price of the bond id calculated by computing the present value.

Enter the below in a financial calculator to compute the present value:

FV= 1,000

N= 40

PMT= 40

I/Y= 5

The value obtained is 828.41.

Therefore, the price of the bond is $828.41.

b. Information provided:

Par value= future value= $1,000

Time= 15 years*2= 30 semi-annual periods

Coupon rate= 8%/2= 4%

Coupon payment= 0.04*1,000= $40

Yield to maturity= 6%/2= 3%

The price of the bond id calculated by computing the present value.

Enter the below in a financial calculator to compute the present value:

FV= 1,000

N= 30

PMT= 40

I/Y= 3

The value obtained is 1,196.

Therefore, the new price of the bond is $1,196.

In case of any query, kindly comment on the solution.