You are called in as a financial analyst to appraise the bonds of Olsen’s Clothi
ID: 2743326 • Letter: Y
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 8 percent, which is paid semiannually. The yield to maturity on the bonds is 10 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.
Compute the price of the bonds based on semiannual analysis. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
With 10 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.)
Compute the price of the bonds based on semiannual analysis. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
Explanation / Answer
Price of the bonds = PV of cashflows over the life of the bod
a. Interest = $1000 x 8% = $800 = $400 per half year
YTM = 10% p.a = 5% semiannually
Life = 15 years = 30 half years
Price of the bond = 400 x sum of PVF @ 5% for 30 years + 1000 x PVF @ 5% for 30th year
= 400 x 15.3725 + 1000 x 0.2314
= $6380.40
b.
Interest = $1000 x 8% = $800 = $400 per half year
YTM = 8% p.a = 4% semiannually
Life = 10 years = 20 half years
Price of the bond = 400 x sum of PVF @ 4% for 20 years + 1000 x PVF 4% for 20th year
= 400 x 12.4622 + 1000 x 0.3769
= $5361.78
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