Wilson Oil Company issued bonds five years ago at $1,000 per bond. These bonds h

Question

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 8 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 bad publicity, the risk premium is now 6 percent and is appropriately reflected in the required return (or yield to maturity) of the bonds. The bonds have 15 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.)

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 8 percent. This return was in line with the required returns by bondholders at that point in time as described below:

Explanation / Answer

The real rate of return + inflation is 2+3=5%

Risk premium now increasedto 6% from 3%.

So yield to maturity increased to6+5=11%.

N is 15 years, FV is 1000, Coupon is 80

So price of bond is 784.27.

Due to bad publicity demand and price of bond reduced and yield increased.

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