8. You are called in as a financial analyst to appraise the bonds of Chappelle,

Question

8. You are called in as a financial analyst to appraise the bonds of Chappelle, Incorporated. The $1,800 par value bonds have a quoted annual interest rate of 13 percent, which is paid semi-annually. The yield to maturity on the bonds is 12 percent annual interest. There are 20 years to maturity.

a. Compute the price of the bonds based on semiannual analysis (2 points).

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 (2 points)?

Explanation / Answer

a)Semiannual interest = 1800*.13*6/12 = 117

semiannual months : 20*2=40

semiannual yield :12*6/12= 6%

Price =[PVA 6%,40*Interest]+[PVF6%,40*Face value]

    =[15.0463*117]+[ .09722*1800]

    = 1760.42+ 175

     =$ 1935.42

b)Semiannual yield : 6*6/12=3%

semiannual months = 10*2=20

Price =[PVA3%,20*Interest]+[PVF3%,20*Face value]

         =[14.87747*117]+ [ .55368*1800]

        = 1740.66+ 996.62

       =$ 2737.28

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