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Tom Cruise Lines Inc. 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 14 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 4 Total return 14 %

Respuesta :

Answer:

Price of the bond  = $1,252.65 (Approx)

Explanation:

Required Return = Real rate of return + Risk premium  + Inflation premium

Required Return [After 5 yr] = 5% + 4% + 2%

Required Return [After 5 yr]  = 11%

Number of year left [for maturity] = 30 -5 = 25  year

Interest payment = $1,000 x 14%

Interest payment = $140

Using Formula in excel;

Price of the bond = pv(rate,nper,pmt,fv)

Price of the bond  = pv(11%,25,140,1000)

Price of the bond  = $1,252.65 (Approx)

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