In: Finance
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Martin Shipping Lines
First compute the new required rate of return (yield to maturity).
Real rate of return 2%
Inflation premium 2%
Risk premium 4%
Total return 8%
Then use this value to find the price of the bond.
Present Value of Interest Payments
PVA = A × PVIFA (n = 20, i = 8%) Appendix D
PVA = $270 × 9.818 = $2,650.86
Present Value of Principal Payment at Maturity
PV = FV × PVIF (n = 20, i = 8%) Appendix B
PV = $2,700 × .215 = $580.5
The new price of the bond = $2,650.86+ $580.5 = $3,231.36