Tom Cruise Lines Incorporated 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 Inflation premium Risk premium Total return 3% 6 5 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. Note: Do not round intermediate calculations. Round your final answer to 2 decimal places. Assume interest payments are annual. New price of the bond
Tom Cruise Lines Incorporated 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 Inflation premium Risk premium Total return 3% 6 5 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. Note: Do not round intermediate calculations. Round your final answer to 2 decimal places. Assume interest payments are annual. New price of the bond
Chapter6: Fixed-income Securities: Characteristics And Valuation
Section: Chapter Questions
Problem 15P
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Vijay
Transcribed Image Text:Tom Cruise Lines Incorporated 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
Inflation premium
Risk premium
Total return
3%
6
5
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.
Note: Do not round intermediate calculations. Round your final answer to 2 decimal places. Assume interest payments are
annual.
New price of the bond
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