The Vinny Cartier Company issued bonds at $1,000 per bond. The bonds had a 25-year life when issued, with

The Vinny Cartier Company issued bonds 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 return5% Inflation premium4% Risk premium3% Total return12%

Assume that ten years later 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.

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