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

	Bond price

b. With 20 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.)

	New bond price

Answer 1

. Information provided:

Face value= future value= $1,000

Time= 25 years*2= 50 semi-annual periods

Yield to maturity= 12%/2= 6%

Coupon rate= 10%/2= 5%

Coupon payment= 0.05*1,000= $50

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

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

FV= 1,000

N= 50

I/Y= 6

PMT= 50

Press the CPT key and FV to compute the present value.

The value obtained is 842.38.

Therefore, the price of the bond is $842.38.

b. Information provided:

Face value= future value= $1,000

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

Yield to maturity= 8%/2= 4%

Coupon rate= 10%/2= 5%

Coupon payment= 0.05*1,000= $50

The new price of the bond is calculated by computing the present value.

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

FV= 1,000

N= 40

I/Y= 4

PMT= 50

Press the CPT key and FV to compute the present value.

The value obtained is 1,197.93.

Therefore, the new price of the bond is $1,197.93.

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