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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
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 | 5% |
Total return | 15% |
Assume that five years later the inflation permium is only 3% and is approperately 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.
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