Tom Cruise Lines Inc. issued bonds five years ago at $1,000 per bond. These bond
ID: 2767244 • Letter: T
Question
Tom Cruise Lines Inc. issued bonds five years ago at $1,000 per bond. These bonds had a 30-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: Assume that five years later the inflation premium is only 2 percent and is appropriately reflected in the required return (or yield to 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 final answer using the formula and financial calculator methods.Explanation / Answer
Bond Details Amt $ After 5 years Bond Face value 1,000 Years to Maturity = 25 Yearly Coupon @14% 140 Prevailing YTM (after reduction of inflation premium by 4%)= 10.00% Bond Price Calculation Period Cash Flow from Interest & Maturity value PV factor @10% PV of Cash Flows 1 140 0.909 127.27 2 140 0.826 115.70 3 140 0.751 105.18 4 140 0.683 95.62 5 140 0.621 86.93 6 140 0.564 79.03 7 140 0.513 71.84 8 140 0.467 65.31 9 140 0.424 59.37 10 140 0.386 53.98 11 140 0.350 49.07 12 140 0.319 44.61 13 140 0.290 40.55 14 140 0.263 36.87 15 140 0.239 33.51 16 140 0.218 30.47 17 140 0.198 27.70 18 140 0.180 25.18 19 140 0.164 22.89 20 140 0.149 20.81 21 140 0.135 18.92 22 140 0.123 17.20 23 140 0.112 15.63 24 140 0.102 14.21 25 1,140 0.092 105.22 Total $ 1,363.08 So Bond Price after 5 years = $ 1,363.08