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 11 percent, which is paid semiannually. The yield to maturity on the bonds is 12 percent annual interest. There are 10 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.) Bond price b. With 5 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.) New bond price

Answer 1

The bond price can be calculated using the following formula

Coupon Bond =C+1-(1+YTM)- YTM + (1+ YTM

Where

C = Periodic coupon payment,

P = Par value of bond,

YTM = Yield to maturity

n = No. of periods till maturity

Using this formula in excel we can calculate the price

a) The price is $942.65 (working and formula in excel)

А 1 Particulars 2 Frequency 3 YTM 4 Coupon Rate 5 Pare Value 6 Year To Maturity 7 No Of Periods 8 Price в Value 2 as semi annual payment 12% given 11% given 1000 given 10 given 20 =B6*B2 942.65| = (B4/B2*B5)*(1-(1+B3/B2)^(-37))/(B3/B2)+B5/((1+B3/B2)^B7) 9

b) With 5 years to maturity and YTM as 10% the new price will be

The new price will be $ 1038.61 (working in excel)

А 1 Particulars 2 Frequency з YTM 4 Coupon Rate 5 Pare Value 6 Year To Maturity 7 No Of Periods 8 Price Value 2 as semi annual payment 10% given 11% given 1000 given 5 given 10 =B6%B2 1038.61 =(B4/B2*B5)*(1-(1+B3/B2)^(-B7)/(B3/B2)+B5/((1+B3/B2)^B7) 9 10