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 9 percent, whih is paid semiannually. The yield to maturity on the bonds is 8 percent annual interest. There are 15 years to maturity. Use appendix B and Appendix D for an approximate answer but calulate your final answer using the formula and finanial calculator methods. a. Compute the price of the bonds based on semiannual analysis. (Do not round intermediate calcculations. Round your final answer to 2 decimal places.) Bond Price $_____________ b.

With 10 years 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 finanl answer to 2 decimal places.) New Bond Price $_______________

Answer 1

1.Price of the bonds based on semiannual analysis (Annual YTM = 8% => Semi Annual YTM = 4%)

Price of Bond = Semi Annual Coupon * PVAF(0.04,30) + Maturity * PVF(0.04,30)

Price of Bond = $1000 * 9% * 1/2 * 17.2920 + 1000 * 0.3083

Price of Bond = $778.14 + 308.32

Price of Bond = $1086.46

2. Price of the bonds based on semiannual analysis (Annual YTM = 6% => Semi Annual YTM = 3%)

Price of Bond = Semi Annual Coupon * PVAF(0.03,20) + Maturity * PVF(0.03,20)

Price of Bond = $1000 * 9% * 1/2 * 14.8775 + 1000 * 0.5537

Price of Bond = $669.49 + 553.68

New Price of Bond = $1223.16

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