The town of Mount Hope is financing a $4.4 million upgrade to its water system though...

The town of Mount Hope is financing a $4.4 million upgrade to its water system though the province’s Municipal Finance Authority (MFA). The MFA obtained financing via a bond issue with interest at 7.4% compounded semi-annually. At the end of every 6 months, the town is to make equal payments into a sinking fund administered by the MFA so that the necessary funds will be available to repay the $4.4 million bond when it matures in 20 years. The sinking fund earns 5% compounded semi-annually. a. Determine the semi-annual interest payments made to the bond holders. b. Determine the amount of the sinking fund payments. c. Determine the semi-annual expense of the debt to the town of Mount Hope.

Expert Solution

Part (a):

Face value of bond= $4.4 Million

Interest rate= 7.4% compounded semi annually.

Amount of semi annual interest payment= Face Value*Int rate/2

= $4,400,000*0.074/2 = $162,800

Part (b):

Amount of sinking fund payments= $65,279.43 as follows:

Part (c):

Semi annual expense of the debt to the town of Mount Hope= Semi annual interest payments on bond plus the semi annual payments to Sinking fund

=$162,800 + $65,279.43 = $228,079.43

jeff jeffy answered 1 year ago

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