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.

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.)

New bond price: ___________

Explanation / Answer

FV = 1,000

Coupon Rate = 9%

Semi Annual coupon rate = 9%/ 2 = 4.5%

Semi Annual coupon rate = 45

N = 10 * 2 = 20

I = 12%

Semi Annual Rate = 12%/ 2 = 6%

Using Financial Calculator:

PV = 827.95

Part 2:

FV = 1,000

Coupon Rate = 9%

Semi Annual coupon rate = 9%/ 2 = 4.5%

Semi Annual coupon rate = 45

N = 10 * 2 = 20

I = 10%

Semi Annual Rate = 10%/ 2 = 5%

Using Financial Calculator:

PV = 961.39

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