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WilsonOilCompanyissuedbondsfiveyearsagoat$1,000perbond.Thesebondshada25-yearlifewhenissuedandtheannualinterestpaymentwasthen15percent.Thisreturnwasinlinewiththerequiredreturnsbybondholdersatthatpointintimeasdescribednext:Realrateofreturn............8%Inflationpremium............3%Riskpremium...................4%Totalreturn..................15%Assumethat10yearslater,duetobadpublicity,theriskpremiumisnow7percentandisappropriatelyreflectedintherequiredreturn(oryieldtomaturity)ofthebonds.Thebondshave15yearsremaininguntilmaturity.Computethenewpriceofthebond
WilsonOilCompanyissuedbondsfiveyearsagoat$1,000perbond.Thesebondshada25-yearlifewhenissuedandtheannualinterestpaymentwasthen15percent.Thisreturnwasinlinewiththerequiredreturnsbybondholdersatthatpointintimeasdescribednext:Realrateofreturn............8%Inflationpremium............3%Riskpremium...................4%Totalreturn..................15%Assumethat10yearslater,duetobadpublicity,theriskpremiumisnow7percentandisappropriatelyreflectedintherequiredreturn(oryieldtomaturity)ofthebonds.Thebondshave15yearsremaininguntilmaturity.Computethenewpriceofthebond
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