Question

A bond has the following features: Coupon rate of interest (paid annually): 11 percent Principal: $1,000 Term to maturity: 8 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 eight years if the funds earn 8 percent annually and there is $100 million outstanding? Use Appendix C to answer the question. Round your answer to the nearest dollar.

$________

Answer 1

a)

When the bond matures bond holder receives the Pricipal amount of bond ( how ever last payment may also includes last coupon payment of 1000 * 11% = 110 but principal is correct answer)

b)

Value of bond = present value of future cash flows discounted at interest rate

Coupon = 1000*11% = 110

Value of bond = 110*PVIFA(r = 8%; n = 8 years) + 1000*PVF(r = 8% ; n = 8)

Value of bond = 110*5.747 + 1000 *0.540

= $1172

C)

YES , since the bond is selling for a premium

d)

Each year remittance = 100 million /future value of annuity

= 100,000,000 / FVIFA(r = 8% ; n = 8 )

= 100,000,000 / 10.637

= $9,401,147

( However exact amount using financial calculator = 9,401,476 difference is due to rounding error)