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 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.

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.)

New bond price $   

Explanation / Answer

Present Value of Interest Payments

PVA = A × PVIFA (n = 10, i = 4%)                         Appendix D

PVA = $65 × 8.1109 = $ 527.21

Present Value of Principal Payment at Maturity

PV = FV × PVIF (n = 10, i = 4%)                   Appendix B

PV = $1,000 × 0.6756 = $ 675.60

                                                                                 $ 527.21

                                                                                    675.60

                                                                               $1,202.81

New Bond Price $ 1202.81

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