You are given the following information concerning a noncallable, sinking fund debenture:
• Principal: $1,000
• Coupon rate of interest: 7 percent
• Term to maturity: 15 years
• Sinking fund: 5 percent of outstanding bonds retired annually; the balance at maturity
a. If you buy the bond today at its face amount and interest rates rise to 12 percent after three years have passed, what is your capital gain (loss)?
b. If you hold the bond 15 years, what do you receive at maturity?
c. What is the bond’s current yield as of right now?
d. Given your price in a, what is the yield of maturity?
e. Is there any reason to believe that the bond will be called after three years have elapsed if interest rates decline?
f. What proportion of the total debt issue is retired by the sinking fund?
g. What assets secure this bond?
h. If the final payment to retire this bond is $1,000,000, how much must the firm invest annually to accumulate this sum if the firm is able to earn 7 percent on the invested funds?

  • CreatedMarch 19, 2015
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