Question

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 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.)
**

Answer #1

K = N |

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k] + Par value/(1 + YTM)^N |

k=1 |

K =20 |

Bond Price =∑ [(16*1000/100)/(1 + 20/100)^k] + 1000/(1 + 20/100)^20 |

k=1 |

Bond Price = 805.22 |

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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
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Inflation premium
4
Risk premium
3
Total return
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Assume that 10 years later, due to bad publicity, the risk premium
is now 7...

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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
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