Tom Cruise Lines Inc. issued bonds five years agao at $1,000 per bond. These bonds had a 25-year life when issued and the annual interest payment was then 15%. This return was in line with the required returns by bondholders at that point as described next:
Real rate of return 4%
Inflation premium 6%
Risk premium
5%
Total return 15%
Assume that five years later the inflation premium is only 3% 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.