Question

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 11 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 4 Risk premium 4 Total return 11 % 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. The bonds have 30 years remaining until maturity.

Answer 1

Answer:

The question is calculate the current price of the bond?

The answer is: Current price of the bond is $1,094.27.

Explanation:

We have:

* The current required rate of return = Real rate of return + Inflation premium + Risk premium = 3% + 4% + 3% = 10%

* Bond's coupon = Face value x interest rate = 1,000 x 11% = $110

=> Current price of the bond is the present value of its future cash flows including 30 coupon payment annually and one principal repayment at the end of 30-year time, discounted at 10%; which is calculated as:

(110/10%) x [ 1 - 1.1^(-30) ] + [1,000/1.1^(30)] = $1,094.27.

So, the answer is $1,094.27.