Sepia Inc. issued bonds for $350,000 that were redeemable in 8 years. They estab

Question

Sepia Inc. issued bonds for $350,000 that were redeemable in 8 years. They established a sinking fund that was earning 4.97% compounded semi-annually to pay back the principal of the bonds on maturity. Deposits were being made to the fund at the end of every 6 months.

a. Calculate the size of the periodic sinking fund deposit.

Round your answer up to the next cent

b. Calculate the sinking fund balance at the end of the payment period 10.

Round to the nearest cent

c. Calculate the interest earned in payment period 11.

Round to the nearest cent

d. Calculate the amount by which the sinking fund increased in payment period 11.

Explanation / Answer

a) Deposit can be calculated using PMT function

N = 8 x 2 = 16, FV = 350,000, PV = 0, I/Y = 4.97%/2 => Compute PMT = $18,080.86

b) Balance at the end of period 10 can be calculated using FV function

N = 10, PV = 0, I/Y = 4.97%/2, PMT = 18,080.86 => Compute FV = $202,427.41

c) Interest earned in payment period 11 = 202,427.41 x 4.97% / 2 = $5,030.32

d) In payment period 11, amount increased = Interest Earned + Deposit = 5,030.32 + 18,080.86 = $23,111.18

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