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 Inflation premium Risk premium Total return 3% 6 5 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 Appendix B Present value of $1, PVF PV = FV (1 + 1)" Period 1% 3% 4% 8% 9% 12% 10% 0.909 11% 0.901 1 0.990 2 3 4 0.962 0.925 0.889 0.855 0.822 0.790 0.760 0.980 0.971 0.961 0.951 0.942 0.933 0.923 0.826 0.751 0.683 0.621 0.564 5 0.812 0.731 0.659 0.593 0.535 0.482 0.434 6 2% 0.980 0.961 0.942 0.924 0.906 0.888 0.871 0.853 0.837 0.820 0.804 0.788 0.773 0.758 0.743 0.728 0.893 0.797 0.712 0.636 0.567 0.507 0.452 0.404 0.361 7 0.917 0.842 0.772 0.708 0.650 0.596 0.547 0.502 0.460 0.422 0.388 0.356 8 9 0.914 0.391 10 0.905 0.322 0.971 0.943 0.915 0.888 0.863 0.837 0.813 0.789 0.766 0.744 0.722 0.701 0.681 0.661 0.642 0.623 0.605 0.587 0.570 0.554 0.478 0.352 0.317 11 0.896 0.887 5% 0.952 0.907 0.864 0.823 0.784 0.746 0.711 0.677 0.645 0.614 0.585 0.557 0.530 0.505 0.481 0.458 0.436 0.416 0.396 0.377 0.295 0.231 0.142 0.087 Percent 6% 7% 0.943 0.935 0.890 0.873 0.840 0.816 0.792 0.763 0.747 0.713 0.705 0.666 0.665 0.623 0.627 0.582 0.592 0.544 0.558 0.508 0.527 0.475 0.497 0.444 0.469 0.415 0.442 0.388 0.417 0.362 0.394 0.339 0.371 0.317 0.350 0.296 0.331 0.277 0.312 0.258 0.233 0.184 0.174 0.131 0.097 0.067 0.054 0.034 0.287 0.257 12 0.286 0.926 0.857 0.794 0.735 0.681 0.630 0.583 0.540 0.500 0.463 0.429 0.397 0.368 0.340 0.315 0.292 0.270 0.250 0.232 0.215 0.146 0.099 0.046 0.021 13 0.879 0.326 0.731 0.703 0.676 0.650 0.625 0.601 0.577 0.555 0.534 0.513 0.494 0.475 0.456 0.375 0.258 14 0.870 0.229 0.205 0.183 15 16 0.513 0.467 0.424 0.386 0.350 0.319 0.290 0.263 0.239 0.218 0.198 0.180 0.164 0.149 0.092 0.057 0.022 0.009 0.163 17 18 0.861 0.853 0.844 0.836 0.828 0.820 0.780 0.742 0.672 0.608 19 0.299 0.275 0.252 0.231 0.212 0.194 0.178 0.116 0.075 0.032 0.013 0.232 0.209 0.188 0.170 0.153 0.138 0.124 0.074 0.044 0.714 0.700 0.686 0.673 0.610 0.552 0.453 0.372 20 0.146 0.130 0.116 0.104 0.059 0.033 0.011 0.003 25 30 0.308 40 0.412 0.307 0.228 0.208 0.015 0.005 50 0.141 Appendix B (concluded) Present value of $1 Percent Period 15% 18% 19% 25% 40% 50% 1 30% 0.769 0.592 2 3 13% 0.885 0.783 0.693 0.613 0.543 14% 0.877 0.769 0.675 0.592 0.519 0.870 0.756 0.658 0.572 17% 0.855 0.731 0.624 0.534 0.456 0.847 0.718 0.609 0.515 0.840 0.706 0.593 0.499 0.419 0.714 0.510 0.364 4 35% 0.741 0.549 0.406 0.30 1 0.223 0.165 0.122 0.09 1 0.260 0.186 5 0.497 0.437 6 0.390 0.352 7 0.333 0.285 0.133 0.095 0.068 0.296 0.249 8 0.667 0.444 0.296 . 198 0.132 0.088 .059 0.039 .026 0.017 .012 0.008 0.432 0.376 0.327 0.284 0.247 0.215 0.187 9 0.067 10 11 0.480 0.425 0.376 0.333 0.295 0.261 0.231 0.204 0.181 0.160 0.141 0.125 0.111 0.098 16% 0.862 0.743 0.641 0.552 0.476 0.410 0.354 0.305 0.263 0.227 0.195 0.168 0.145 0.125 0.108 0.093 0.080 0.069 0.060 0.051 0.024 0.012 0.003 0.001 12 20% 0.833 0.694 0.579 0.482 0.402 0.335 0.279 0.233 0.194 0.162 0.135 0.112 0.093 0.078 0.065 0.054 0.045 0.038 0.031 0.026 0.0 10 0.004 0.800 0.640 0.512 0.410 0.328 0.262 0.210 0.168 0.134 0.107 0.086 0.069 0.055 0.044 0.035 0.028 0.023 0.018 0.014 0.048 0.035 0.025 0.018 0.013 0.009 0.455 0.350 0.269 0.207 0.159 0.123 0.094 0.073 0.056 0.043 0.033 0.025 0.020 0.015 0.012 0.009 0.007 0.005 0.456 0.400 0.351 0.308 0.270 0.237 0.208 . 182 0.160 0.140 0.123 0.108 0.095 0.083 0.073 0.038 0.020 0.005 0.00 1 13 0.163 0.141 0.370 0.314 0.266 0.225 0.191 0.162 0.137 0.116 0.099 0.084 0.071 0.060 0.051 0.043 0.037 0.016 0.007 0.001 14 0.243 0.208 0.178 0.152 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.043 0.020 0.009 0.002 15 0.209 0.176 0.148 0.124 0.104 0.088 0.074 0.062 0.052 0.044 0.037 0.031 0.013 0.005 0.001 16 0.050 0.037 0.027 0.020 0.015 0.011 0.008 0.006 0.005 0.003 0.002 0.005 0.003 0.002 0.002 0.001 0.001 0.123 0.107 0.093 0.081 0.070 0.061 0.030 0.015 0.004 17 0.006 0.005 0.003 0.002 0.002 0.001 18 19 20 25 0.001 0.00 1 0.087 0.047 0.026 0.008 0.012 0.004 0.001 0 30 40 0.001 50 0.002 0.001 0 Appendix D Present value of an annuity of $1, PVFA PVA=A 1 - 1 (1 + i) Percent Period 2% 3% 4% 6% 7% 8% 9% 10% 12% 1% 0.990 5% 0.952 0.971 1.913 0.962 1.886 0.943 1.833 0.935 1.808 0.893 1.690 2 1.970 0.980 1.942 2.884 3.808 0.917 1.759 2.531 3.240 11% 0.901 1.713 2.444 3.102 3 2.941 2.829 0.926 1.783 2.577 3.312 3.993 2.402 4 0.909 1.736 2.487 3.170 3.791 2.775 3.630 4.452 3.902 1.859 2.723 3.546 4.329 5.076 5.786 3.717 2.673 3.465 4.212 2.624 3.387 4.100 3.037 3.605 5 4.853 4.713 4.580 3.890 6 5.417 5.242 4.917 4.767 4.623 4.355 4.111 5.795 6.728 7 5.601 6.472 7.325 6.002 5.389 4.868 4.564 5.206 5.747 8 7.652 6.733 6.463 6.230 7.020 7.786 8.530 4.486 5.033 5.535 5.995 6.418 9 8.566 7.435 6.247 8.162 8.983 5.335 5.759 6.145 10 8.111 5.582 6.210 6.802 7.360 7.887 8.384 8.853 9.471 10.368 11.255 12.134 13.004 13.865 11 12 13 14 7.108 7.722 8.306 8.863 9.394 9.253 9.954 10.635 8.760 9.385 9.986 10.563 11.118 4.968 5.328 5.650 5.938 6.194 6.424 5.971 6.515 7.024 7.499 7.943 8.358 8.745 9.108 9.447 9.763 10.059 6.710 7.139 7.536 7.904 6.805 7.161 7.487 6.495 6.814 7.103 3.696 4.231 4.712 5.146 5.537 5.889 6.207 6.492 6.750 6.982 7.191 7.379 7.549 7.702 7.839 7.963 8.422 9.899 8.244 6.628 7.367 7.606 7.786 8.061 8.313 15 16 6.811 8.559 8.851 14.718 1 1.652 7.824 6.974 17 9.787 10.575 11.348 12.106 12.849 13.578 14.292 14.992 15.678 16.351 19.523 22.396 27.355 31.424 11.296 11.938 12.561 13.166 13.754 14.324 14.877 10.380 10.838 11.274 11.690 12.085 8.022 18 9.122 9.372 9.604 8.201 15.562 16.398 17.226 18.046 22.023 25.808 19 9.295 9.712 10.106 10.477 10.828 11.158 11.470 12.783 13.765 15.046 15.762 8.544 8.756 8.950 9.129 10.336 7.120 7.250 7.366 7.469 7.843 10.594 12.166 12.659 13.134 13.590 15.622 17.292 19.793 21.482 9.818 20 25 30 12.462 14.094 17.413 9.823 11.654 12.409 8.365 8.514 9.077 9.427 9.779 9.915 15.372 10.274 8.694 8.055 10.675 11.258 11.925 12.233 40 19.600 23.115 25.730 17.159 32.835 39.196 13.332 10.757 10.962 8.951 9.042 8.244 8.304 50 18.256 13.801 Appendix D (concluded) Present value of an annuity of $1 Percent Period 13% 14% 15% 16% 17% 20% 25% 30% 35% 40% 50% 19% 0.840 1 0.885 0.877 0.870 0.862 0.855 0.833 0.800 0.769 0.741 0.714 0.667 18% 0.847 1.566 2.174 2 1.668 1.361 1.585 2.210 1.528 2.106 1.440 1.952 1.289 1.696 1.224 1.589 1.111 1.407 3 1.816 4 1.626 2.283 2.855 3.352 3.784 2.743 1.647 2.322 2.914 3.433 3.889 4.288 1.605 2.246 2.798 3.274 3.685 2.361 2.974 3.517 3.998 4.423 1.605 5 3.199 3.589 3.922 2.690 3.127 3.498 1.547 2.140 2.639 3.058 3.410 3.706 3.954 4.163 4.339 2.589 2.991 3.326 2.362 2.689 2.951 3.161 3.329 3.463 2.166 2.436 2.643 2.802 1.737 1.824 1.997 2.220 2.385 2.508 2.598 2.665 1.849 2.035 2.168 2.263 2.331 7 4.160 4.039 3.812 1.883 3.605 3.837 8 4.487 4.207 4.078 2.925 1.922 4.639 4.946 4.344 4.607 9 4.772 4.451 4.303 4.031 3.019 2.379 1.948 10 4.659 4.494 4.192 3.571 2.715 2.414 1.965 11 4.656 4.327 3.656 4.799 5.132 5.426 5.687 5.918 6.122 6.302 6.462 2.438 5.019 5.234 5.421 5.583 3.092 3.147 3.190 4.486 4.611 2.752 2.779 12 4.439 2.456 5.216 5.453 5.660 5.842 6.002 6.142 6.265 13 4.833 5.029 5.197 5.342 5.468 5.575 5.668 4.715 4.533 2.799 2.469 1.977 1.985 1.990 1.993 1.995 14 5.724 4.802 4.611 2.814 2.825 2.478 2.484 15 5.847 4.876 3.725 3.780 3.824 3.859 3.887 3.910 3.928 4.675 16 6.604 4.836 4.988 5.118 5.229 5.324 5.405 5.475 5.534 5.584 5.628 5.766 5.954 4.938 4.730 2.834 2.489 1.997 17 6.729 4.775 2.840 2.492 2.494 18 6.840 4.793 4.910 5.008 5.092 5.162 5.222 5.273 5.316 5.353 5.467 5.517 5.548 5.554 4.812 2.844 6.373 6.467 6.550 6.623 6.873 6.047 6.128 6.198 6.259 4.988 5.033 5.070 5.101 3.223 3.249 3.268 3.283 3.295 3.304 3.311 3.316 3.329 3.332 3.333 3.333 1.998 1.999 1.999 19 4.843 2.848 2.496 20 4.870 5.749 5.818 5.877 5.929 6.097 6.177 6.233 6.246 3.942 3.954 3.985 2.497 1.999 2.850 2.856 6.464 5.195 4.948 2.499 2.000 6.938 7.025 7.330 7.496 7.634 7.675 25 30 40 6.566 3.995 7.003 7.105 7.133 5.829 5.871 5.880 6.642 5.235 5.258 5.262 4.979 4.997 4.999 2.500 2.500 2.857 2.857 2.857 3.999 2.000 2.000 2.000 50 6.661 4.000 2.500