om 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 terest payment was then 13 percent. This return was in line with the required returns by bondholders at that point as described elow: Real rate of return. Inflation premium Risk premium Total return 3% 5 5 13% ssume that five years later the inflation premium is only 2 percent and is appropriately reflected in the required return (or yield to haturity) of the bonds. The bonds have 15 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 decimaln
om 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 terest payment was then 13 percent. This return was in line with the required returns by bondholders at that point as described elow: Real rate of return. Inflation premium Risk premium Total return 3% 5 5 13% ssume that five years later the inflation premium is only 2 percent and is appropriately reflected in the required return (or yield to haturity) of the bonds. The bonds have 15 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 decimaln
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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![Problem 10-13 Effect of yield to maturity on bond price [LO10-3]
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
Inflation premium
Risk premium
Total return
3%
5
5
13%
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 15 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](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fca88f942-5df3-4e8a-8263-1f78e8a64e58%2Fd657b58f-df92-49c9-91a5-d8e984847321%2Ftm28rrm_processed.png&w=3840&q=75)
Transcribed Image Text:Problem 10-13 Effect of yield to maturity on bond price [LO10-3]
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
Inflation premium
Risk premium
Total return
3%
5
5
13%
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 15 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
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