Tom Cruise Lines Inc. 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 as described
below:
Real rate of return | 3 | % |
Inflation premium | 6 | |
Risk premium | 5 | |
Total return | 14 | % |
Assume that five years later the inflation premium is only 3
percent and is appropriately reflected in the required return (or
yield to maturity) of the bonds. The bonds have 25 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.)
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