Explore BrainMass

Explore BrainMass

    Price of bond when inflation premium changes

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    T 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 12 percent. This return was in line with the required returns by bondholders at that point as described below:

    Real rate of return . . . . . . . . . . . . 3%
    Inflation premium . . . . . . . . . . . . 5
    Risk premium . . . . . . . . . . . . . . . 4
    Total return . . . . . . . . . . . . . . . 12%

    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.

    © BrainMass Inc. brainmass.com June 3, 2020, 5:22 pm ad1c9bdddf
    https://brainmass.com/business/bond-valuation/price-of-bond-when-inflation-premium-changes-23972

    Solution Preview

    Real rate of return . 3%
    Inflation premium 3%
    Risk premium 4%
    Total return 10%

    To calculate the price of the bond we need to calculate / read from tables the values of
    PVIF= Present Value Interest Factor
    PVIFA= Present Value ...

    Solution Summary

    The solution calculates bond price when inflation premium changes using step by step, easy to understand calculations.

    $2.19

    ADVERTISEMENT