Question

A bond has the following features:

Coupon rate of interest (paid annually): 10 percent

Principal: $1,000

Term to maturity: 12 years

What will the holder receive when the bond matures?

If the current rate of interest on comparable debt is 8 percent, what should be the price of this bond? Assume that the bond pays interest annually. Use Appendix B and Appendix D to answer the question. Round your answer to the nearest dollar.

$

Would you expect the firm to call this bond? Why?

, since the bond is selling for a .

If the bond has a sinking fund that requires the firm to set aside annually with a trustee sufficient funds to retire the entire issue at maturity, how much must the firm remit each year for twelve years if the funds earn 8 percent annually and there is $90 million outstanding? Use Appendix C to answer the question. Round your answer to the nearest dollar.

$

Answer 1

Question- What will the holder receive when the bond matures?

Answer - $ 1000 - Principal amount

Question- If the current rate of interest on comparable debt is 8 percent, what should be the price of this bond?

Answer -

Year	Cash Flow	Disc Factor@8%	Present Value
1-12	$ 100	7.536	$ 753.6
12	$ 1000	0.397	$ 397
			$1150.6

Therfore price of the bond will bw $ 1151

Question- If the bond has a sinking fund that requires the firm to set aside annually with a trustee sufficient funds to retire the entire issue at maturity, how much must the firm remit each year for twelve years if the funds earn 8 percent annually and there is $90 million outstanding?

Answer -

Let "r" be interest and "n" be no of years

Future value= Annual Payment *{ ( 1+ r )^n -1 ) / r )

$90000000 = Annual Payment *{ ( 1+0.08 )^12 -1 ) / 0.08 )

$90000000 = Annual Payment * 18.9771

Annual payment = $ 90000000 / 18.9771 = $ 4742558

Firm has to remit $ 4742558 annually to sinking fund.