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 11 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.)
BOND PRICE_____

  
b. With 15 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_____

Appendix B Present value of $1,PVF PV=FV Percent Period 4 Appendlx B (concluded) Percent Period 50% 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 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579 0512 0.455 0.406 0.364 0.296 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 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279 0.210 0.159 0.122 0.095 0.059 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135 0.086 0.056 0.037 0.025 0.012 0.160 0.140 0.123 0.108 0.095 0.084 0.074 0.065 0.035 0.020 0.011 0.006 0.002 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045 0.023 0.012 0.006 0.003 0.001 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 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026 0.012 0.005 0.002 0.001 0 0.047 0.038 0.030 0.024 0.020 0.016 0.013 0.010 0.004 0.001 0.001 0 0.026 0.020 0.015 0.012 0.009 0.007 0.005 0.004 0.001 0

Explanation / Answer

1

Coupons=11%*1000/2=55

Face Value=1000

Number of periods=20*2=40

r=14%/2=7%

Price=55/1.07+55/1.07^2...............55/1.07^40+1000/1.07^40

=55/1.07*(1-1/1.07^40)/(1-1/1.07)+1000/1.07^40

=55/0.07*(1-1/1.07^40)+1000/1.07^40

=800.02

2

Coupons=11%*1000/2=55

Face Value=1000

Number of periods=15*2=30

r=8%/2=4%

New Price=55/1.04+55/1.04^2...............55/1.04^30+1000/1.04^30

=55/1.04*(1-1/1.04^30)/(1-1/1.04)+1000/1.04^30

=55/0.04*(1-1/1.04^30)+1000/1.04^30

=1259.38

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