PLEASE SHOW ALL WORK. THANK YOU !! 9. A bond has the following features: * Coupo

Question

PLEASE SHOW ALL WORK. THANK YOU !!


9. A bond has the following features:
* Coupon rate of interest: 8%
* Principal: $1,000
* Term to maturity: 10 years

a. What will the holder receive when the bond matures?
b. If the current rate of interest on comparable debt is 12 percent, what should be the price of this bond? Would you expect the firm to call this bond? Why?
c. 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 10 years if the funds earn 9 percent annually and there is $10 million outstanding?

Explanation / Answer

a. The principal of $1,000 b. Price = $1,000 x 0.3220 + $1,000 x 8% x 5.6502 Price = $322 + $452.02 Price = $774.02 c. FV = Annual Payments x FV of Annuity Factor @9% for 10 years $10,000,000 = Annual Payment x 15.19293 Annual Payment = $10,000,000 / 15.19293 Annual Payment = $658,200.89 The firm should set aside $658,200.89 at the end of each year.

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