Problem:
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 10 percent, which is paid semiannually. The yield to maturity on the bonds is 10 percent annual interest. There are 15 years to maturity.
Requirement:
Question 1: Compute the price of the bonds based on semiannual analysis.
Question 2: With 10 years to maturity, if yield to maturity goes down substantially to 8 percent, what will be the new price of the bonds?
Note: Provide support for your underlying principle.