Question

Media Bias Inc. issued bonds 10 years ago at $1,000 per bond. These bonds had a 40-year life when issued and the annual interest payment was then 14 percent. This return was in line with the required returns by bondholders at that point in time as described below:

Real rate of return | 5 | % |

Inflation premium | 4 | |

Risk premium | 5 | |

Total return | 14 | % |

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 30 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 of Bond:

Answer #1

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 11 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 3 percent and is appropriately reflected in the
required return (or yield to maturity) of the bonds. The...

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 14 percent. This return was in line with
the required returns by bondholders at that point in time as
described below:
Real rate of return
7
%
Inflation premium
4
Risk premium
3
Total return
14
%
Assume that 10 years later, due to bad publicity, the risk premium
is now 7...

Wilson Oil Company issued bonds five years ago at $1,000 per
bond. These bonds had a 25-year life when issued and the annual
interest payment was then 14 percent. This return was in line with
the required returns by bondholders at that point in time as
described below: Real rate of return 7 % Inflation premium 3 Risk
premium 4 Total return 14 % Assume that 10 years later, due to bad
publicity, the risk premium is now 6 percent...

Tom Cruise Lines Inc. issued bonds five years ago at $1,000 per
bond. These bonds had a 25-year life when issued and the annual
interest payment was then 14 percent. This return was in line with
the required returns by bondholders at that point as described
below:
Real rate of return 3 %
Inflation premium 6
Risk premium 5
Total return 14 %
Assume that five years later the inflation premium is only 3
percent and is appropriately reflected in...

Tom Cruise Lines Inc. 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 14 percent. This return was in line with
the required returns by bondholders at that point as described
below:
Real rate of return
3
%
Inflation premium
6
Risk premium
5
Total return
14
%
Assume that five years later the inflation premium is only 3
percent and is appropriately reflected...

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 16 percent. This return was in line with
the required returns by bondholders at that point in time as
described below:
Real rate of return
8
%
Inflation premium
4
Risk premium
4
Total return
16
%
Assume that 10 years later, due to bad publicity, the risk premium
is now 8...

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 13 percent. This return was in line with
the required returns by bondholders at that point in time as
described below: Real rate of return 5 % Inflation premium 4 Risk
premium 4 Total return 13 % Assume that 10 years later, due to bad
publicity, the risk premium is now 7 percent...

Tom Cruise Lines Inc. issued bonds five years ago at $1,000 per
bond. These bonds had a 25-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 as described
below:
Real rate of return 3 %
Inflation premium 4
Risk premium 5
Total return 12 %
Assume that five years later the inflation premium is only 3
percent and is appropriately reflected in...

Tom Cruise Lines Inc. issued bonds five years ago at $1,000 per
bond. These bonds had a 25-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 as described
below: Real rate of return 3 % Inflation premium 4 Risk premium 5
Total return 12 % Assume that five years later the inflation
premium is only 3 percent and is appropriately reflected in...

Martin Shipping Lines issued bonds ten years ago at $5,900 per
bond. The bonds had a 30-year life when issued, with semiannual
payments at the then annual rate of 10 percent. This return was in
line with required returns by bondholders at that point, as
described below:
Real rate of
return
2
%
Inflation
premium
4
Risk premium
4
Total return
10
%
Assume that today the inflation premium is only 2 percent and is
appropriately reflected in...

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