Arizona State University BUS BUS MISC Tom Cruise Lines Inc. issued bonds five years ago at $1,000 per…

Arizona State University BUS BUS MISC Tom Cruise Lines Inc. issued bonds five years ago at $1,000 per…

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:

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Real rate of return3%Inflation premium4 Risk premium5 Total return12%

 

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.

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