1. You are called in as a financial analyst to appraise the bonds of Olsen’s Clo
ID: 2819403 • Letter: 1
Question
1. 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 8 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 6 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____
2. BioScience Inc. will pay a common stock dividend of $5.60 at the end of the year (D1). The required return on common stock (Ke) is 19 percent. The firm has a constant growth rate (g) of 12 percent.
Compute the current price of the stock (P0). (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Current Price____
Explanation / Answer
(1)
(a)
Quoted Rate of Bond Interest = 9 % paid semi-annually, Yield to Maturity = 8 % per annum, Face Value = $ 1000 and Time to Maturity = 15 years or 30 half-years
Semi-Annual Coupon = PMT = 0.09 x 1000 x 0.5 = $ 45
The financial calculator mode of solving for the bond price would involve summing the present values of the semi-annual coupon payments and the redeemed bond face value received upon bond maturity
Calculator Inputs:
N = 30 half-years, I/Y = Half of Yield to Maturity = 4 %, PMT = $ 45, FV = $ 1000 and PV = Bond Price = ?
The same can be solved using the annuity formula as given below:
PV = Bond Price = 45 x (1/0.04) x [1-{1/(1.04)^(30)}] + 1000 / (1.04)^(30) = $ 1086.46
(b) Time Remaining To Maturity = 10 years or 20 half-years and New Yield to Maturity = 6 % per annum or 3 % per half-year
Therefore, new bond price at 10 years to maturity = 45 x (1/0.03) x [1-{1/(1.03)^(20)}] + 1000 / (1.03)^(20) = $ 1223.16
NOTE: Please raise a separate query for the solution to the second unrelated question.
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