1. XYZ Inc. sold $5,000,000 of 7.5%, 25-year, semiannual payment bonds 20 years ago. The bonds are not callable, but they do have a sinking fund provision requiring 10% of the original face value to be redeemed each year ($500,000), beginning in Year 15. To date, 50% of the issue has been retired. The company can either call bonds at par for sinking fund purposes or purchase bonds on the open market, spending sufficient money to redeem 10% of the original face value each year. If the nominal yield to maturity on the bonds is currently 8.25%, what is the least amount of money XYZ Inc. must put up to satisfy the sinking fund provision?

2. Consider a 15-year semiannual floating rate bond with coupon rate determined with the following formula:

Coupon rate = reference rate + 65bps

What’s the discount margin of the bond if the bond price is 99.5730 and current reference rate is 9%?

3. Suppose that an investor with a 5-year investment horizon is considering purchasing a 7-year 9% coupon bond selling at par. The investor expects that he can reinvest the coupon payments at an annual interest rate of 9.4% and that at the end of the investment horizon 2-year bonds will be selling to offer a yield to maturity of 11.2%. Assuming semiannual compounding, what is the total return for this bond?

Answer rating: 100% (QA)

Stepbystep explanation Explanation to Answer 1 Face value of the bond 5000000 but to date 50 has bee... View the full answer