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 15 percent. This return was in line with the required returns by bondholders at that point as described below: |
Real rate of return | 5 | % |
Inflation premium | 6 | |
Risk premium | 4 | |
Total return | 15 | % |
Assume that five years later the inflation premium is only 2 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.) |
New price of the bond |
$ |
Required Return after 5 year = Real rate of return + Inflation premium + Risk premium
Required Return after 5 year = 5+2+4
Required Return after 5 year =11%
No of year left to maturity = 25
Annual Interest payment = 15%*1000 = 150
Face value of Bond = 1000
New price of the bond = pv(rate,nper,pmt,fv)
New price of the bond = pv(11%,25,150,1000)
New price of the bond = $ 1336.87
Tom Cruise Lines Inc. issued bonds five years ago at $1,000 per bond. These bonds had...
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 Inflation premium Risk premium 3% 6 5 14% Total return Assume that five years later the inflation premium is only 2 percent and is appropriately reflected in the required...
Tom Cruise Lines Inc. issued bonds five years ago at $1,000 per bond. These bonds had a 25-year life when issued and the annual interest payment was then 15 percent. This return was in line with the required returns by bondholders at that point as described below: 5% Real rate of return Inflation premium Risk premium Total return 15% Assume that five years later the inflation premium is only 3 percent and is appropriately reflected in the required return (or...
Tom Cruise Lines Inc. issued bonds five years ago at $1,000 per bond. These bonds had a 25-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...
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 Inflation premium Risk premium Total return 38 6 5 148 Assume that five years later the inflation premium is only 2 percent and is appropriately reflected in the required...
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 15 percent. This return was in line with the required returns by bondholders at that point as described below: Real rate of return 5 % Inflation premium 5 Risk premium 5 Total return 15 % Assume that five years later the inflation premium is only 2 percent and is appropriately reflected in...
Tom Cruise Lines Inc. issued bonds five years ago at $1,000 per bond. These bonds had a 25-year life when issued and the annual interest payment was then 13 percent. This return was in line with the required returns by bondholders at that point as described below: Real rate of return 4 % Inflation premium 5 Risk premium 4 Total return 13 % Assume that five years later the inflation premium is only 3 percent and is appropriately reflected in...
Tom Cruise Lines Inc. Issued bonds five years ago at $1000 per bond. These bonds had a 25- year life when issued and the annual interest payment was then 13 percent. This return was in line with the required returns by bondholders at that point as described below 5 l rate of inflation premiun Risk preniun Total returs 139 eBlook Assume that five years later the inflation premium is only 3 percent and is appropriately reflected in the required retum...
Tom Cruise lines Inc. issued bonds five years ago at $1000 per bond. These bonds had a 30 year life when issued and the annual interest payment was then 15%. This return was in line with the required returns by bondholders at that point as described below: Real rate of return: 5% Inflation premium: 5% Risk of premium 5% Total return: 15% Assume that five years later the inflation premium is only 3% and is appropriately reflected in the required...
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