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 bonds is 12 percent annual interest. There are 20 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.)

b. With 15 years to maturity, if yield to maturity goes down substantially to 10 percent, what will be the new price of the bonds? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

Answer 1

Ans 1):

F = $1000 for corporate bond

Coupon rate annual = 13%, therefore, Coupon rate semi-annual = 13%/2 = 6.5%

C = 6.5% x $1000 = $65 per period

t = 20 years x 2 = 40 periods for semi-annual coupon payments

T = 40 periods

coupons​=∑C/(1+r)t

​face value​=F/(1+r)t

where:

C=future cash flows, that is, coupon payments

r=discount rate, that is, yield to maturity

F=face value of the bond

t=number of periods

T=time to maturity

So Bond Value as per the below Chart will be : Value Of Bond=Present Value of semi-annual payments+Present Value of face value.

Value of Bond= $538.85+ $10.75=$ 546.59

Tenure Coupans 1 $ 2 $ 58.04 51.82 3 $ 4 $ 4627 41.31 5 $ 3688 6 S 7 $ 32.93 29.40 8 S 26.25 9 $ 10 $ 23.44 20.93 11 S 1869 12 S 1668 13 $ 14.90 14 $ 15 $ 1330 11.88 16 S 1060 17 S 9.47 18 S 845 19 S 7.55 20 S 674 21 $ 602 22 S 537 23 $ 4.80 24 $ 4.28 25 S 3.82 26 $ 341 27 S 28 $ 305 2.72 29 $ 2.43 30 $ 2.17 31 $ 194 32 S 173 154 34 $ 138 35 S 1.23 36 $ 1.10 37 S 0.98 38 $ 0.88 078 40 $ $ 070 Coupan Value 535.85 Face Value 10.75 Present Value Of Bonds S 546.59

Ans 2) F = $1000 for corporate bond

Coupon rate annual = 13%, therefore, Coupon ratesemi-annual = 13%/2 = 6.5%

C = 6.5% x $1000 = $65 per period

t = 15 years x 2 = 30 periods for semi-annual coupon payments

T = 30 periods

coupons​=∑C/1+rt

​face value​=F/(1+r)t

where:

C=future cash flows, that is, coupon payments

r=discount rate, that is, yield to maturity

F=face value of the bond

t=number of periods

T=time to maturity

So Bond Value as per the below Chart will be : Value Of Bond=Present Value of semi-annual payments+Present Value of face value.

Value of Bond= $612.75+ $57.37=$ 670.06

Coupans Tenure 1 $ 2 $ 59.09 53.72 3 $ 48.84 4 S 44.40 5 $ 4036 6 $ 7 $ 3669 3336 8 S 3032 9 S 10 $ 27.57 2506 11 $ 22.78 12 $ 13 S 20.71 18.83 14 S 15 $ 16 S 17.12 15.56 14.15 17 $ 12.86 18 S 11.69 19 S 10 63 20 $ 9.66 21 $ 878 22 S 7.98 7.26 24 $ 660 25 S 6.00 26 $ 545 27 S 28 S 4.96 4.51 29 $ 30 $ 4.10 373 Coupan Value $ $ 612.75 Face Value 57.31 $ Present Value Of Bonds 670.06

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