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

"1143.817" is the appropriate answer.

Step-by-step explanation:

According to the question:

Risk premium is:

=
`4+3+4`

=
`11 \ percent`

K = N

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

`k = 1`

K = 15

On putting the values, we get

⇒ Bond Price =
`\Sigma [(13* (1000)/(100) )/((1 + (11)/(100))^k) ] + (1000)/((1 + (11)/(100) )^(15))`

=
`1143.817`