# Question: Wilson Oil Company issued bonds five years ago at 1 000

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

Real rate of return ......... 8%

Inflation premium ......... 3

Risk premium ........... 4

Total return ............. 15%

Assume that 10 years later, due to bad publicity, the risk premium is now 7 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.

Real rate of return ......... 8%

Inflation premium ......... 3

Risk premium ........... 4

Total return ............. 15%

Assume that 10 years later, due to bad publicity, the risk premium is now 7 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.

## Relevant Questions

Lance Whittingham IV specializes in buying deep discount bonds. These represent bonds that are trading at well below par value. He has his eye on a bond issued by the Leisure Time Corporation. The $1,000 par value bond pays ...You are called in as a financial analyst to appraise the bonds of Olsenâ€™s Clothing Stores. The $1,000 par value bonds have a quoted annual interest rate of 10 percent, which is paid semiannually. The yield to maturity on ...A firm pays a $1.50 dividend at the end of year one (D1), has a stock price of $155 (P0), and a constant growth rate (g) of 10 percent.a. Compute the required rate of return (Ke). Indicate whether each of the following ...Discuss the relationship between bond prices and interest rates. What impact do changing interest rates have on the price of long-term bonds versus short-term bonds?Preston Corporation has a bond outstanding with an $80 annual interest payment, a market price of $1,250, and a maturity date in 10 years. Assume the par value of the bonds is $1,000.Find the following:a. The coupon rate.b. ...Post your question