Oil Company issued bonds five years ago at $I,000 per bond. These bonds had a 25

Question

Oil Company issued bonds five years ago at $I,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]

Explanation / Answer

Particulars Inflow Discount Factor PV Interest Income 80                        0.90      72.07 Interest Income 80                        0.81      64.93 Interest Income 80                        0.73      58.50 Interest Income 80                        0.66      52.70 Interest Income 80                        0.59      47.48 Interest Income 80                        0.53      42.77 Interest Income 80                        0.48      38.53 Interest Income 80                        0.43      34.71 Interest Income 80                        0.39      31.27 Interest Income 80                        0.35      28.17 Interest Income 80                        0.32      25.38 Interest Income 80                        0.29      22.87 Interest Income 80                        0.26      20.60 Interest Income 80                        0.23      18.56 Interest Income 80                        0.21      16.72 Present Value of all Coupon payment    575.27 Terminal Value (PV of 1000)    209.00 Bond Value    784.27

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