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Tom Cruise Lines Incorporated 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.

Tom Cruise Lines Incorporated 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 3 percent and is appropriately reflected in the required return (or yield to maturity) of the bonds. The bonds have 25 years remaining until maturity.

 

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Compute the new price of the bond

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