Question

Wilson Oil Company issued bonds five years ago at $1,000 per bond. These bonds had a 30-year life when issued and the ann interest payment was then 9 percent. This return was in line with the required returns by bondholders at that point in time as described below: Real rate of return Inflation premium Risk premium Total return mm Assume that 10 years later, due to bad publicity, the risk premium is now 7 percent and is appropriately reflected in the required return (or yield to maturity) of the bonds. The bonds have 20 years remaining until maturity. Compute the new price of the bond. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. (Do not round intermediate calculations. Round your final answer to 2 decimal places. Assume interest payments are annual.) New price

Answer 1

B $ A A Par value (FV) BCoupon rate C| Number of compounding periods per year D = AxB/C Interest per period (PMT) 1,000 9% 90 E Number of years to maturity 20 13% =3%+3%+7% Number of compounding periods till F = CxE maturity (NPER) G|Market rate of return/Required rate of Market rate of return/Required rate of G/creturn per period (RATE) New price 13% 14 PV(RATE,NPER,PMT,FV)*-1 New price $ 719.01 =PV(13%,20,90,1000)*-1

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