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 13 percent, which is paid semiannually. The yield to maturity on the a. Compute the price of the bonds based on semiannual analysis. (Do not round Intermediate calculations. Round your final answer to 2 decimal places.) Hond price $1,186 93 b. With 5 years to maturity, If yleld to maturity goes down substantially to 8 percent, what will be the new price of the bonds? (Do not round Intermedlate calculations. Round your final answer to 2 decimal places. New bond price

Answer 1

	CALCULATION OF THE VALUE OF THE BOND INTEREST IS PAID SEMI ANNUALLY
	Step 1 : Calculation of Semi Annual Coupon Payments
	Par value of the bond issued is   =			$1,000
	Annual Coupon %			13.00%
	Annual Coupon Amount			$130
	Semi Annual Coupon Amount			$65
	Step 2: Calculate number of years to Maturity
	Number of years to maturity = 10 years
	Interest is paid semi annyally so total period = 10 Years * 2 = 20 Periods
	Step 3 : Caclulation of Current Market Price (intrinsic value) of the bonds
	Market rate of interest or Yield to Maturity or Required Return = 10%
	Bonds interest is paid semi annualy means so discounting factor = 10 % /2= 5 %
	PVF = 1 / Discount rate = 1/ 1.05
	Result of above will again divide by 1.05 , repeat this lat period
	Period	Interest	Amount (In Million)	PVF @ 5%	PresentValue
	1	Interest	$65	0.9524	$61.90
	2	Interest	$65	0.9070	$58.96
	3	Interest	$65	0.8638	$56.15
	4	Interest	$65	0.8227	$53.48
	5	Interest	$65	0.7835	$50.93
	6	Interest	$65	0.7462	$48.50
	7	Interest	$65	0.7107	$46.19
	8	Interest	$65	0.6768	$43.99
	9	Interest	$65	0.6446	$41.90
	10	Interest	$65	0.6139	$39.90
	11	Interest	$65	0.5847	$38.00
	12	Interest	$65	0.5568	$36.19
	13	Interest	$65	0.5303	$34.47
	14	Interest	$65	0.5051	$32.83
	15	Interest	$65	0.4810	$31.27
	16	Interest	$65	0.4581	$29.78
	17	Interest	$65	0.4363	$28.36
	18	Interest	$65	0.4155	$27.01
	19	Interest	$65	0.3957	$25.72
	20	Interest	$65	0.3769	$24.50
	20	Par Value	$1,000	0.3769	$376.89
		Total			$1,186.93
		Current Bonds Price =			$1,186.93
	SIMULTANEOUSLY WE CAN SOLVE WITH BELOW MEHTOD
	OR		Cumulative value of $ 1 @ 5 % in 10 Years
	Interest	$65.00	12.4622	810.04
	Par Value at 30th Period	$1,000	0.3769	376.89
	Current Bonds Price			1,186.93
	CALCULATION OF THE VALUE OF THE BOND INTEREST IS PAID SEMI ANNUALLY
	Step 1 : Calculation of Semi Annual Coupon Payments
	Par value of the bond issued is   =			$1,000
	Annual Coupon %			13.00%
	Annual Coupon Amount			$130
	Semi Annual Coupon Amount			$65
	Step 2: Calculate number of years to Maturity
	Number of years to maturity = 8 years
	Interest is paid semi annyally so total period = 5 Years * 2 = 10 Periods
	Step 3 : Caclulation of Current Market Price (intrinsic value) of the bonds
	Market rate of interest or Yield to Maturity or Required Return = 8%
	Bonds interest is paid semi annualy means so discounting factor = 8 % /2= 4 %
	PVF = 1 / Discount rate = 1/ 1.04
	Result of above will again divide by 1.04 , repeat this lat period
	Period	Interest	Amount (In Million)	PVF @ 4 %	PresentValue
	1	Interest	$65	0.9615	$62.50
	2	Interest	$65	0.9246	$60.10
	3	Interest	$65	0.8890	$57.78
	4	Interest	$65	0.8548	$55.56
	5	Interest	$65	0.8219	$53.43
	6	Interest	$65	0.7903	$51.37
	7	Interest	$65	0.7599	$49.39
	8	Interest	$65	0.7307	$47.49
	9	Interest	$65	0.7026	$45.67
	10	Interest	$65	0.6756	$43.91
	10	Par Value	$1,000	0.6756	$675.56
		Total			$1,202.77
		Current Bonds Price =			$1,202.77
	SIMULTANEOUSLY WE CAN SOLVE WITH BELOW MEHTOD
	OR		Cumulative value of $ 1 @ 4 % in 10 Preiods
	Interest	$65.00	8.1109	527.21
	Par Value at 30th Period	$1,000	0.6756	675.56
	Current Bonds Price			1,202.77