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 next:

Real Rate of Return 5%

Inflation Premium 4

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.)

remaining until maturity. Compute the new price of the bond.

7 Appendix B Present value of S1.PVF PV = FV F Period 29 5% 10% 11% ILLET 1 2 0.980 0.961 3 1% 0.990 0.980 0.971 0.961 0.951 0.942 0.933 0.942 6 7 8 9 0.923 0.914 0.905 0.896 0.887 10 11 3% 0.971 0.943 0.915 0.888 WODO 0.863 0.837 0.813 0.789 0.766 0.744 0.722 0.701 0.681 W.OO 0.661 0.642 0.623 0.605 0.587 0.570 0.554 0.478 0.412 0.307 0.228 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 0.924 0.929 0.906 0.888 0.871 0.853 0.837 0.820 0.804 0.788 0.773 0.758 0.743 0.728 0.714 0.700 0.686 0.673 0.610 0.552 0.453 0.372 4% 0.962 0.925 0.889 0.855 0.822 0.790 0.760 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 0.308 0.208 0.141 Percent 6% 7% 0.943 0.935 0.890 0.873 0.840 0.816 0.763 0.792 W. 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 12 13 14 15 8% 0.926 0.857 0.794 0.735 0.135 0,681 0.630 0.583 0.540 an 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 9% 0.917 0.842 0.772 0.708 0.650 0.596 0.547 0.502 0.460 0.422 0.388 0.356 0.326 0.299 0.275 0.252 0.231 0.212 0.194 0.178 0.116 0.075 0.032 0.013 0.909 0.826 0.751 0.683 0.621 0.564 0.513 we 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 0.901 0.812 0.15 0.659 0.05 0.593 0.535 0.482 0.434 0.391 0.352 0.317 0.286 0.258 0.232 0209 0.188 0.170 0.153 0.138 0.124 0.074 12% 0.893 0.797 0.712 0.636 0.567 0.507 0.452 0.404 0.361 0.322 0.287 0.257 0.229 0.205 0.183 0.163 0.146 0.130 0.116 0.104 0.059 16 17 0.879 0.870 0.861 0.853 0.844 0.836 0.828 0.820 0.780 0.742 0.672 0.608 18 19 ... 20 25.......... 30 40 50 0.458 0.436 0.416 0.396 0.377 0.295 0.231 0.142 0.087 0.044 0.033 0.011 0.003 0.015 0.005 0.034 Copyright 2019 0 McGruw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Appendix B (concluded) Present value of 51 Percent Period 13% 16% 18% 25% 35% 1 2 3 4. 5 6 0.885 0.783 0.693 0.613 0.543 0.480 Visou 0.425 wa 0.376 0.333 0.295 0.261 0.231 7 15% 0.870 0.756 0.658 0.572 0.497 0.432 W34 0.376 Visio 0.327 0.284 0.247 0.215 0.187 0.163 0.141 . 0.123 8 9... 10 14% % 0.877 0.769 0.675 0.592 4:31 0.519 0.456 0.400 0.351 0.30B 0.270 0.237 0.208 0.182 0.160 0.140 0.123 0.108 0.095 0.083 0.073 0.038 0.020 0.005 0.001 11 12 13 14 15 0.862 0.743 0.641 0.552 0.476 wo 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 17% 0.855 0.731 0.624 0.534 0.456 1.590 0.390 0.333 0.285 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 0 30% 0.769 0.592 0.455 0.350 0.269 0.269 0.207 0.159 15 0.123 0.094 0.073 0.056 0.043 0.033 0.025 0.020 0.847 0.718 0.609 0.515 0.437 0.370 0.314 Wien 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 0 19% 0.840 0.706 0.593 0.499 0.499 0.419 . 0.352 4.24 0.296 1.23 0.249 0.209 0.176 0.148 0.124 0.104 0.088 0.074 0.062 0.052 0.054 0.044 0.037 0.031 0.013 0.005 0.001 0 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 ca 0.054 0.045 0.038 0.031 0.026 0.010 0.004 0.001 0 0.800 0.640 0.512 0.410 0.328 0.262 V.202 0.210 0.168 0.134 w 0.107 0.086 0.069 0.055 0.044 0.035 0.028 0.023 0.018 0.014 0.012 0.004 0.001 0 0.741 0.549 0.406 0.301 0.223 J.cz . 0.165 0.122 0.091 0.067 0.050 0.037 0.027 0.020 0.015 0.011 0.008 0.006 0.005 0.003 0.002 0.001 0 0 40% 0.714 0.510 0.364 0.260 0.186 0.133 0.095 1.09 0.068 0.048 0.035 0.025 0.018 0.013 0.009 0.006 0.005 0.003 0.002 0.002 0.001 0 0 0 0 50% 0.667 0.444 0.296 0.198 0.132 0.154 0.088 we 0.059 0.039 0.026 0.017 0.012 0.008 0.005 0.003 0.002 0.002 0.001 0.001 0 0 0 0 0 o O 16 17 0.107 0.015 19 HE 0.204 0.181 0.160 0.141 0.125 0.111 0.098 0.087 0.047 0.026 0.008 0.002 19 20 25 30 40 50 0.093 0.081 vo 0,070 0.061 0.030 0.015 0.004 0.001 0.012 0.009 0.007 0.005 0.001 0 0 0 0 0 Copyright 2019 O McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education