Reflected in the required return of the bonds

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Reference no: EM13894458

Tom Cruise Lines Inc. issued bonds five years agao at $1,000 per bond. These bonds had a 25-year life when issued and the annual interest payment was then 15%. This return was in line with the required returns by bondholders at that point as described next:

Real rate of return 4%

Inflation premium 6%

Risk premium

Total return 15%

Assume that five years later the inflation premium is only 3% and is appropriately reflected in the required return (or yield to maturity) of the bonds. The bonds have 20 years remaining until maturity. Compute the new price of the bond.

Reference no: EM13894458

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