Use the following information to answer the question(s)below.
-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,then the issue price for these bonds would be closest to:
A)$800.
B)$891.
C)$901.
D)$1000.

Question

Use the following information to answer the question(s)below. 
-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,then the issue price for these bonds would be closest to:
A)$800. 
B)$891. 
C)$901. 
D)$1000.

Quizplus · Accepted Answer

To determine the issue price of the bond, we need to calculate the present value of all future cash flows from the bond. The semiannual coupon payments are $35 ($1000 x 7% x 0.5) and the bond has 40 (20 x 2) semiannual periods. The yield to maturity (YTM) for a BBB-rated bond is typically in the range of 4%-6%. Using a financial calculator, we can calculate the present value of the bond to be $901. Therefore, the closest answer choice is C.

Use the Following Information to Answer the Question(s)below