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 Store& 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 10 percent annual interest There are 15 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 10 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 $

Explanation / Answer

Yield To Maturity =Interest+ FV-BV/n/ FV+BV/2 FV= face Value BV = Book Value n = Years to maturity 15*2= 30 Interest = 1000*10%/2 $50 .05= 50+1000-X/30//1000+X/2 .05= 1500+1000-x/30//1000+x/2 .05= 5000-2X /30000+30X 5000-2X = 1500+1.5X 3.5X = 3500 X = 3500/3.5 X = 1000 If YTM is 8% .04= 50+1000-X/30//1000+X/2 .04= 1500+1000-x/30//1000+x/2 .04= 5000-2X /30000+30X 5000-2X = 1200+1.2X 3.2X = 3800 X = 3800/3.2 X = 1187.5 New bond price will be $ 1187.5

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