E10-4

Wilson Oil Company issued bonds five years ago at $1,000 per bond. These bonds had a 30-year life when issued and the annual 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 return2%Inflation premium4Risk premium3Total return9%

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. UseAppendix BandAppendix Dfor 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 =

E10-5

Lance Whittingham IV specializes in buying deep discount bonds. These represent bonds that are trading at well below par value. He has his eye on a bond issued by the Leisure Time Corporation. The $1,000 par value bond pays 8 percent annual interest and has 17 years remaining to maturity. The current yield to maturity on similar bonds is 13 percent.

a.What is the current price of the bonds? UseAppendix BandAppendix Dfor 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.)

Current Price of the Bond =

b.By what percent will the price of the bonds increase between now and maturity?(Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

Price increases by= (%)