You are called in as a financial analyst to appraise the bonds of Olsen\'s Cloth

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 10 percent, which is paid semiannually. The yield to maturity on the bonds is 10 percent annual interest. There are 15 years to maturity. a. Compute the price of the bonds based on semiannual analysis. b. With 10 years to maturity, if yield to maturity goes down substantially to 8 percent, what will be the new price of the bonds? (Please show all steps and explain)

Explanation / Answer

calculation of PV of bond (a) the market interest rate is 5% per semiannual period. The 5% market interest rate per semiannual period is symbolized by i. (The market rate of 10% per year was divided by 2 semiannual periods per year to arrive at the market interest rate of 5% per semiannual period.) The bond's life of 15 years is multiplied by 2 to arrive at 30 semiannual periods. The number of semiannual periods is symbolized by n. Each Semi annual interest payment is= 1000*10%*6/12=50 (i = 5%, n = 30, PMT = 50) There for present value of ordinary annuity (PVOA)=PMT X(PVOA factor for n=30 semiannual period,i=5% semi annual period discounding factor for a period of 30 semi annual period=15.372 PVOA= 50*15.372 PVOA=768.6 Present value of bonds maturity=1000*.2313=231.3 there for total value of bond=768.6+231.3=999.9 (b) Value of bond With 10 years to maturity, if yield to maturity goes down substantially to 8 percent ` 1000*10%*6/12=50 (i = 5%, n = 30, PMT = 50) The bond's life of 10 years is multiplied by 2 to arrive at 20 semiannual periods. The number of semiannual periods is symbolized by n. There for present value of ordinary annuity (PVOA)=PMT X(PVOA factor for n=20 semiannual period,i=5% semi annual period discounding factor for a period of 20 semi annual period=12.462 PVOA= 50*12.462 PVOA=623.1 yield on maturity is 8% for calculating semi annual interest rate we want to divide it by 2 ie 4% semi annualy discount factor of 4% at the time of maturityis.456 Present value of bonds maturity=1000*.456=456 there for total value of bond=623.1+456=1079.1

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.