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 13 percent, which is paid semiannually. The yield to maturity on the bonds is 10 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 bonds based on semiannual analysis. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
  

  
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.Future value= $1,000

Coupon rate= 13%/2= 6.50%

Coupon payment= 0.0650*1,000= $65

Time= 10 years*2= 20 semi-annual periods

Yield to maturity= 10%/2= 5%

The price of the bond is calculated by entering the below in a financial calculator:

FV= 1,000; PMT= 65; N= 20; I/Y= 5

Press CPT and PV to calculate the price of the bond.

The price of the bond is $1,186.93.

b.Future value= $1,000

Coupon rate= 13%/2= 6.50%

Coupon payment= 0.0650*1,000= $65

Time= 5 years*2= 10 semi-annual periods

Yield to maturity= 8%/2= 4%

The price of the bond is calculated by entering the below in a financial calculator:

FV= 1,000; PMT= 65; N= 10; I/Y= 4

Press CPT and PV to calculate the price of the bond.

The new price of the bond is $1,202.77.