Question

Use excel or financial calculator

A bond has the following features:

• Coupon rate of interest (paid annually): 12 percent
• Principal: $1,000
• Term to maturity: 10 years

1. What will the holder receive when the bond matures?

   -Select-Principal/ All coupon payments

2. 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. Round your answer to the nearest dollar.

   $  

   Would you expect the firm to call this bond? Why?

   -Select-Yes/No , since the bond is selling for a -Select-discount/premium.

3. 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 ten years if the funds earn 8 percent annually and there is $120 million outstanding? Round your answer to the nearest dollar.

   $  

Answer 1

A) A holder will receive the principal amount when the bond matures.

B) Principal (FV) = $ 1,000

Period (nper) = 10 years

Rate (rate) = 8%

Coupon (pmt) = 12% * 1,000

= $ 120

Using the PV function in the excel sheet, we can calculate the price of the bond as:

= PV(rate, nper, -pmt, -fv)

= PV(8%, 10, -120, -1000)

= $ 1,268.40

Yes the firm would expect to call this bond as it is selling for premium.

C) The firm should remit the following amount each year:

= Amount Outstanding / Future Value of Annuity Factor

= 120,000,000 / (((1 + i) ^ n – 1) / i)

= 120,000,000 / (((1 + 0.08) ^ 10 – 1) / 0.08)

= 120,000,000 / ((2.1589 - 1 ) / 0.08)

= 120,000,000 / 14.4863

= $ 8,283,538.64 or $ 8,283,539