The Vinny Cartier Company issued bonds in 2005 at $1,000 per bond. The bonds had a 25-year
Question:
The Vinny Cartier Company issued bonds in 2005 at $1,000 per bond. The bonds had a 25-year life when issued, with semiannual payments at the then annual rate of 12 percent. This return was in line with required returns by bondholders at that point, as described below:
Real rate of return ............. .. .. .. . ....... .3%
Inflation premium .............. . . .. .. . ....... .6
Risk premium .......... . ............................3
Total return ...................... . ..................12%
Assume that in 2015 the inflation premium is 3 percent, the risk premium has declined to 2 percent and both are appropriately reflected in the required return (or yield to maturity) of the bonds. The bonds have 15 years remaining until maturity. Compute the new price of the bond.
Step by Step Answer:
Vinny Cartier Company First compute the new required rate of retur...View the full answer
Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta
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