Tom Cruise Lines, Inc.,

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

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Real rate of return………….        4%

Total return……………….      15%

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.First, use the financial calculator or Excel to find out the coupon rate.N = 25Interest Rate = 15%Present value = -1000Future value = 1000You will find out Coupon rate = 15%Five years later,…

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