Question

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.

Answer 1

Answer:

"1143.817" is the appropriate answer.

Explanation:

According to the question:

Risk premium is:

= $4+3+4$

= $11 \ percent$

K = N          

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

$k = 1$

K = 15  

On putting the values, we get

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

                   = $1143.817$