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 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. (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 10 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

n= 40
I = 7%
Cashflow				Amouunt	PVF	Present value
Semi annual Interest (1000*12%*6/12)				60	13.33171	799.9026
Principal				1000	0.06678	66.78
Price of bonds						866.6826
n = 30
I = 5%
Cashflow				Amouunt	PVF	Present value
Semi annual Interest (1000*12%*6/12)				60	15.37245	922.347
Principal				1000	0.231377	231.377
Price of bonds						1153.724