BUSI 320 - connect homework 5

4. Award: 1.80 points Katie Pairy Fruits Inc. has a $1,300 14-year bond outstanding with a nominal yield of 18 percent (coupon equals 18% x $1,300 = $234 per year). Assume that the current market required interest rate on similar bonds is now only 12 percent. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. a. Compute the current price of the bond. (Do not round intermediate calculations. Round your final answer to 2 decimal places. Assume interest payments are annual.) Current price of the bond b. Find the present value of 6 percent x $1,300 (or $78) for 14 years at 12 percent. The $78 is assumed to be an annual payment. Add this value to $1,300. (Do not round intermediate calculations. Round your final answer to 2 decimal places. Assume interest payments are annual.) Present value3. Award: 1.80 points Tom Cruise Lines Inc. issued bonds five years ago at $1,000 per bond. These bonds had a 25-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 3% Inflation premium 6 Risk premium 5 Total return 14% 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 20 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