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 8 percent annual interest. There are 10 years to maturity. Use Appendix B andAppendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.

1. Compute the price of the bonds based on semiannual analysis. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

2. With 5 years to maturity, if yield to maturity goes down substantially to 6 percent, what will be the new price of the bonds? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

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 8 percent annual interest. There are 10 years to maturity. Use Appendix B andAppendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.

1. Compute the price of the bonds based on semiannual analysis. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

2. With 5 years to maturity, if yield to maturity goes down substantially to 6 percent, what will be the new price of the bonds? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

Explanation / Answer

Question 1. Semiannual Interest Maturity Total pv factor Present Period at 13% Amount Return at 8% Value 1 65 65 0.961538 62.5 2 65 65 0.924556 60.09615 3 65 65 0.888996 57.78476 4 65 65 0.854804 55.56227 5 65 65 0.821927 53.42526 6 65 65 0.790315 51.37044 7 65 65 0.759918 49.39466 8 65 65 0.73069 47.49486 9 65 65 0.702587 45.66814 10 65 65 0.675564 43.91167 11 65 65 0.649581 42.22276 12 65 65 0.624597 40.59881 13 65 65 0.600574 39.03732 14 65 65 0.577475 37.53588 15 65 65 0.555265 36.09219 16 65 65 0.533908 34.70403 17 65 65 0.513373 33.36926 18 65 65 0.493628 32.08583 19 65 65 0.474642 30.85176 20 65 1000 1065 0.456387 486.0521 Total 1339.758 Answer: $1,339.76 Question 2. Question 1. Semiannual Interest Maturity Total pv factor Present Period at 13% Amount Return at 6% Value 11 65 65 0.970874 63.11 12 65 65 0.942596 61.27 13 65 65 0.915142 59.48 14 65 65 0.888487 57.75 15 65 65 0.862609 56.07 16 65 65 0.837484 54.44 17 65 65 0.813092 52.85 18 65 65 0.789409 51.31 19 65 65 0.766417 49.82 20 65 1000 1065 0.744094 792.46 Total 1298.56 So before 5 years to maturity with 6% interest rate Price of the bond will be $1,298.56.

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