Question: Question 2: a) In relation to the long-term debt, explain the meaning of the term sinking fund. Explain why bondholders often prefer a sinking fund

Question 2: a) In relation to the long-term debt, explain the meaning of the term sinking fund. Explain why bondholders often prefer a sinking fund provision in a bond issue. (8 marks)

b) Philips Industries has bond outstanding ($1,000 par value) that mature 12 years from today and have a coupon interest rate of 9.5 percent. Calculate the maximum price an investor should be willing to pay if the investor desires a 10 percent yield-to-maturity. Determine the change in the price of the bond if investors now require a rate of return of 14 percent due to the increased risk in the economy. (12 marks)

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