You are given the following information concerning a noncallable sinking fund de
ID: 2723160 • Letter: Y
Question
You are given the following information concerning a noncallable sinking fund debenture
Principal $1000
Coupon rate of interest 7 %
Term to maturity 15 years
Sinking fund 5 percent of outstanding bonds retired annually the balance at maturity
A) If you buy the bond today at its face amount and interest rates rise to 12% after three years have passed what is your capital gain or loss?
B) If you hold the bond 15 years what do you recive at maturity?
C) What is the bond current yield as of right now?
D) Given your price in a, what is the yield of maturity
E) Is there any reason to believe that the bond will be called after three years have elapsed if interest rates decline
F) what proportion of the total debt issue is retired by the sinking fund
G) What assets secure this bond?
h) If the final payment to retire this bond is $1,000,000 how much must the firm invest to accumulate this sum if the firm is able to earn 7% on the invest funds.
Explanation / Answer
A) If the interest rates rise to 12%, the price of the bond assuming semi-annual interest payments, will be
1000*pvif(6,24) + 35*pvifa(6,24) = 1000*0.2470 +35*12.5504 = 247 + 439.26 = $686.26
The capital gain would be 1000 - 686.26 = $313.74.
B) Maturity value of $1000, plus half yearly interest of $35.
C) The bonds current yield = 7%, assuming the price of the bond is $1000 today.
D) The yield to maturity is 12%.
E) No, the bonds are not callable.
F) 5%*14 = 70%.
G) Debentures are not secured by any specific asset.
H) It is not specified as to how the money would be invested; whether its a
If it a lump sum to be invested now, the amount should be 1000000/107^15 = $362,446
If it in equal amounts to be invested each year end the annual investments is given by 1,000,000/fvifa(7,15)
= 1000000/25.1290 = $3979.
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