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Tom Cruise Lines issue bonds five years ago at $1,000 per bond. These bonds had a 25-year life when issued and the annual interest payment was 12%. This return was in line with the required returns by bondholders at the point as described below
real rate of return 3%
inflation premium 4%
risk premium 5%
total return 12%
Assume that five years later the inflation premium is only 3% and is appropriately reflected in the require return or yield to maturity of the bonds. The bonds have 20 years remaining until maturity.
New price of the bond?
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