You are called in as a financial analyst to appraise the bonds of Olsen’s Clothi

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, which is paid semiannually. The yield to maturity on the bonds is 12 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.)
Bond Price: ____?

  
b. With 5 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.)

Appendix B Present value of $1, PVF PV=FV Percent Period 9 7 4 Percent Period 2 1 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694 0.640 0.592 0.549 0.510 0.444 0.613 0.592 0.572 0.552 0.534 0.515 0.499 0.482 0.410 0.350 0.301 0.260 0.198 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335 0.262 0.207 0.165 0.133 0.088 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233 0.168 0.123 0.091 0.068 0.039 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162 0.107 0.073 0.050 0.035 0.017 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031 0.014 0.007 0.003 0.002 0 0.047 0.038 0.030 0.024 0.020 0.016 0.013 0.010 0.004 0.001 0.001 0

Explanation / Answer

Part a FV 1000 PMT 45 (1000 X 9%/2) Present value of interest = 45 x 11.470* 516.15 NPER 20 (10 X 2) Present value of face value = 1000 x 0.312** 312 RATE(YTM) 6% (12%/2) 828.15 PV(Price) ($827.95) =PV(0.06,20,45,1000) *present value of $1 annuity, n=20, I = 6% **present value of $1, n= 20, I = 6% So the price of bond is $827.95 Part b FV 1000 Present value of interest = 45 x 7.722* 347.49 PMT 45 (1000 X 9%/2) Present value of face value = 1000 x 0.614** 614 NPER 10 (5 X 2) 961.49 RATE(YTM) 5% (10%/2) PV(Price) ($961.39) *present value of $1 annuity, n=10, I = 5% =PV(0.05,10,45,1000) **present value of $1, n= 10, I = 5% So the new price of bond will be $961.39

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