Use the following information to answer the question(s) below. A) Wyatt Oil is c
ID: 1170230 • Letter: U
Question
Use the following information to answer the question(s) below.
A) Wyatt Oil is contemplating issuing a 20-year bond with semiannual coupons, a coupon rate of 7%, and a face value of $1000. Wyatt Oil believes it can get a BBB rating from Standard and Poor's for this bond issue. If Wyatt Oil is successful in getting a BBB rating, what is the issue price for these bonds?
B)Wyatt Oil is contemplating issuing a 20-year bond with semiannual coupons, a coupon rate of 5%, and a face value of $1000. Wyatt Oil believes it can get a AAA rating from Standard and Poor's for this bond issue. what is the difference in the price the company will receive if the BBB instead of AAA
security term(yrs) yield(%) Treasury 20 5.5% AAA Corporate 20 7% BBB Corporate 20 8% B Corporate 20 9.6%Explanation / Answer
a)
Wyatt oil will use yield of 8%
Rate = 8 / 2 = 4% ( since it is a semi annual bond, we divide by 2)
Coupon payment = 0.07 * 1000 = 70 / 2 = 35
Maturity = 20 * 2 = 40
Face value = 1000
Bond price = C * [ 1 - 1 / ( 1 + r)n]] / r + face value / ( 1 + r)n
Bond price = 35 * [ 1 - 1 / ( 1 + 0.04)40]] / 0.04 + 1000/ ( 1 + 0.04)40
Bond price = 35 * [ 0.791711 / 0.04 ] + 208.289
Bond price = 692.747125 + 208.289
Bond price = $901.036
b)
Wyatt oil will use yield of 7%
Rate = 7 / 2 = 3.5% ( since it is a semi annual bond, we divide by 2)
Coupon payment = 0.05 * 1000 = 50 / 2 = 25
Maturity = 20 * 2 = 40
Face value = 1000
Bond price = C * [ 1 - 1 / ( 1 + r)n]] / r + face value / ( 1 + r)n
Bond price = 25 * [ 1 - 1 / ( 1 + 0.035)40]] / 0.035 + 1000/ ( 1 + 0.035)40
Bond price = $786.449
Difference = 901.036 - 786.449 = 114.587