Question

The Vinny Cartier Company issued bonds at $1,000 per bond. The bonds had a 20-year life when issued, with semiannual payments at the then annual rate of 13 percent. This return was in line with required returns by bondholders at that point, as described below. Real rate of return Inflation premium Risk premium Total return Assume that ten years later the inflation premium is 3 percent, the risk premium has declined to 3 percent and both are appropriately reflected in the required return (or yield to maturity) of the bonds. The bonds have 10 years remaining until maturity. Compute the new price of the bond. (Use a Financial calculator to arrive at the answers. Do not round Intermediate calculations Round the final answer to 2 decimal places.) New price of the bond SO

Answer 1

YTM = Real Return + Inflation Premium + Risk Premium

= 4% + 3% + 3% = 10%

To find the new bond price, we need to put the following values in the financial calculator:

N = 20*2 = 40;

I/Y = 10/2 = 5;

PMT = (13%/2) * 1000 = 65;

FV = 1000;

Press CPT, then PV, which gives us -1257.39

So, Bond's New Price = $1257.39