Question

In: Finance

Martin Shipping Lines issued bonds ten years ago at $2,700 per bond. The bonds had a...

Martin Shipping Lines issued bonds ten years ago at $2,700 per bond. The bonds had a 30-year life when issued, with semiannual payments at the then annual rate of 10 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 2 percent and is appropriately reflected in the required return (or yield to maturity) of the bonds.

      

Compute the new price of the bond.

Solutions

Expert Solution

                                             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

jeff jeffy answered 4 weeks ago
Next > < Previous

Related Solutions

Tom Cruise Lines Inc. issued bonds five years ago at $1,000 per bond. These bonds had...
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 12 percent. This return was in line with the required returns by bondholders at that point as described below: Real rate of return 4 % Inflation premium 5 Risk premium 3 Total return 12 % Assume that five years later the inflation premium is only 2 percent and is appropriately reflected in...
Tom Cruise Lines Inc. issued bonds five years ago at $1,000 per bond. These bonds had...
Tom Cruise Lines Inc. issued bonds five years ago at $1,000 per bond. These bonds had a 20-year life when issued and the annual interest payment was then 13 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 5 Total return 13 % Assume that five years later the inflation premium is only 2 percent and is appropriately reflected in...
Tom Cruise Lines Inc. issued bonds five years ago at $1,000 per bond. These bonds had...
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 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 4 Risk premium 5 Total return 12 % Assume that five years later the inflation premium is only 3 percent and is appropriately reflected in...
Tom Cruise Lines Inc. issued bonds five years ago at $1,000 per bond. These bonds had...
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 15 percent. This return was in line with the required returns by bondholders at that point as described below:    Real rate of return 5 % Inflation premium 5 Risk premium 5 Total return 15 % Assume that five years later the inflation premium is only 3 percent and is appropriately reflected...
Wilson Oil Company issued bonds five years ago at $1,000 per bond. These bonds had a...
Wilson Oil Company 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 9 percent. This return was in line with the required returns by bondholders at that point in time as described below: Real rate of return 3 % Inflation premium 3 Risk premium 3 Total return 9 % Assume that 10 years later, due to bad publicity, the risk premium is now 7 percent...
Media Bias Inc. issued bonds 10 years ago at $1,000 per bond. These bonds had a...
Media Bias Inc. issued bonds 10 years ago at $1,000 per bond. These bonds had a 30-year life when issued and the annual interest payment was then 13 percent. This return was in line with the required returns by bondholders at that point in time as described below: Real rate of return 5 % Inflation premium 4 Risk premium 4 Total return 13 % Assume that 10 years later, due to good publicity, the risk premium is now 3 percent...
Media Bias Inc. issued bonds 10 years ago at $1,000 per bond. These bonds had a...
Media Bias Inc. issued bonds 10 years ago at $1,000 per bond. These bonds had a 25-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: A- 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....
Media Bias Inc. issued bonds 10 years ago at $1,000 per bond. These bonds had a...
Media Bias Inc. 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 13 percent. This return was in line with the required returns by bondholders at that point in time as described below: Real rate of return 3 % Inflation premium 5 Risk premium 5 Total return 13 % Assume that 10 years later, due to good publicity, the risk premium is now 2 percent...
Ten years ago you purchased for $1,200 a bond issued by the ASD Corporation. The bond...
Ten years ago you purchased for $1,200 a bond issued by the ASD Corporation. The bond had twenty years to maturity, a par value of $1,000, a 12% coupon, and paid interest semiannually. Since you had no immediate use for the interest payments, you deposited them in your savings account. For the first 5 years, your bank paid 2% compounded semiannually, but for the last 5 years you have earned 4% compounded semiannually. Tomorrow you will receive your 20th interest...
Johnston Corp has 10,000 bonds outstanding that were issued for 30 years ten years ago at...
Johnston Corp has 10,000 bonds outstanding that were issued for 30 years ten years ago at a par value of RM1,000.00 and a 12% coupon rate with interest being paid semiannually. Similar bonds are now selling to yield 9%. It issued 40,000 shares of 6% preferred stock with par value of RM100.00 eight years ago. These preferred stocks are now selling to yield 10%. There are currently 2,500,000 of common stocks outstanding, selling for RM11.60 per share. Johnston Corp expects...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT