Media Bias Inc. issued bonds 10 years ago at $1,000 per bond. These bonds had a

Question

Media Bias Inc. issued bonds 10 years ago at $1,000 per bond. These bonds had a 30-year life when issued and the annual interest payment was then 12 percent. This return was in line with the required returns by bondholders at that point in time as described below:

Assume that 10 years later, due to good publicity, the risk premium is now 2 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.)

     Real rate of return 4 %   Inflation premium 4   Risk premium 4         Total return 12 %   

Explanation / Answer

Requried rate of return will decrease with decrease in risk premium.

Face value (FV) $                                         1,000 Coupon rate 12.00% Number of compounding periods per year 1 Interest per period (PMT) $                                             120 Number of years to maturity 20 Number of compounding periods till maturity (NPER) 20 Market rate of return/Required rate of return 10.00% Market rate of return/Required rate of return per period (RATE) 10.00% Bond price PV(RATE,NPER,PMT,FV)*-1 Bond price $                                   1,170.27

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