Question

I posted this question and wanted to re-post it to ask if the answer would change if the city puts the funds at the end of each year. Thanks.

City X issues bonds for $45 million for 10 years to raise capital for city operation, how much should the company put in a sinking fund each year at an interest rate of 4% that will repay the debt in 10 years?

Answer 1

Given that issue price of the Bond = $ 45 million.

Time =10 years.

Let X be the investment made each year at an interest rate of 4% that will be repaid in 10 years.

If we multiply the investment made each year with the cumulative present value factor for 10 years at 4% and then equate it with 45 lakhs we will arrive at the investment to be made each year.

X * cumulative(pvaf 4%,10 years) = $ 45 million

X * 8.1109 =$ 45 million.

X = $ 45 / 8.1109

X = $ 5.5481 million per year.

There we have invest $ 5.5481 million every year to earn $ 45 million over 10 years.