Tom Cruise Lines Inc. issued bonds five years ago at $1,000 per bond. These bonds had a 20-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 the required return (or yield to maturity) of the bonds. The bonds have 15 years remaining until maturity. Use Appendix B and Appendix D.

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SerenaBochenek SerenaBochenek · Answer 1 · 2020-10-19T18:19:48+02:00

Answer:

"1143.817" is the appropriate answer.

Explanation:

According to the question:

Risk premium is:

= [tex]4+3+4[/tex]

= [tex]11 \ percent[/tex]

K = N

⇒ Bond Price = [tex]\Sigma [\frac{Coupon}{(1 + YTM)^k} ] + \frac{Per \ value}{(1 + YTM)^N}[/tex]

[tex]k = 1[/tex]

K = 15

On putting the values, we get

⇒ Bond Price = [tex]\Sigma [\frac{13\times \frac{1000}{100} }{(1 + \frac{11}{100})^k} ] + \frac{1000}{(1 + \frac{11}{100} )^{15}}[/tex]

= [tex]1143.817[/tex]