Vijay Tom Cruise Lines Incorporated issued bonds five years ago at $1,000 per bond. These bonds had a 30-year life when issuedand the annual interest payment was then 14 percent. This return was in line with the required returns by bondholders at thatpoint as described below:Real rate of returnInflation premiumRisk premiumTotal return3%6514%Assume that five years later the inflation premium is only 3 percent and is appropriately reflected in the required return (or yieldto maturity) of the bonds. The bonds have 25 years remaining until maturity.Compute the new price of the bond. Use Appendix B and Appendix D for an approximate answer but calculate your finalanswer using the formula and financial calculator methods.Note: Do not round intermediate calculations. Round your final answer to 2 decimal places. Assume interest payments areannual.New price of the bond

Required Return after 5 year = Real rate of return + Inflation premium + Risk premiumRequired Return…

Answered: Tom Cruise Lines Incorporated issued…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Martin Shipping Lines issued bonds 10 years ago at $1,000 per bond. The bonds had a 30-year life when issued, with semiannual payments at the then annual rate of 9 percent. This return was in line with required returns by bondholders at that point, as described below: Real rate of return Inflation premium Risk premium Total return 6% 4 2 12% Assume that today the inflation premium is only 2 percent and is appropriately reflected in the required return (or yield to maturity) of the bonds. Compute the new price of the bond. Use Appendix B and Appendix D. (Round "PV Factor" to 3 decimal places. Do not round intermediate calculations. Round the final answer to 2 decimal places.) New price of the bond
Martin Shipping Lines issued bonds 10 years ago at $ 1,000 per bond. The bonds had a 30-year life when issued, with semiannual payments at the then annual rate of 12 percent. This return was in line with required returns by bondholders at that point, as described below: Real rate of return 2% Inflation premium 4 Risk premium 4 Total return 10 % Assume that today the inflation premium is only 3 percent and is appropriately reflected in the required return (or yield to maturity) of the bonds. Compute the new price of the bond. (Use a Financial calculator to arrive at the answers. Do not round intermediate calculations. Round the final answer to 2 decimal places.) New price of the bond $
Tom Cruise Lines Incorporated 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 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. New price of the bond 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. Note: Do not round intermediate calculations. Round your final answer to 2 decimal places. Assume interest payments are annual. Check my
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Media Bias Incorporated issued bonds 10 years ago at $1,000 per bond. These bonds had a 40-year life when issued and the annual interest payment was then 11 percent. This return was in line with the required returns by bondholders at that point in time as described below: Real rate of return 2% Inflation premium 4 Risk premium 5 Total return 11% Assume that 10 years later, due to good publicity, the risk premium is now 3 percent and is appropriately reflected in the required return (or yield to maturity) of the bonds. The bonds have 30 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.
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Mechmar Corp Berhad bonds pay $70 in annual interest, with a $1,000 par value. The bonds mature in 17 years. Your required rate of return is 8.5% per year. Calculate the value of the bond and interpret your answer. In your opinion, does the bond value change if your required rate of return (k) increase to 11% per year and in another scenario decease to 6% per year?
FYI bonds pay $40 in interest every six months and will mature in 10 years. a. Calculate the price if the yield to maturity on the bonds is 7, 8, and 9 percent, respectively. b. Explain the impact on price if the required rate of return decreases.

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