Question: You are given the following information concerning a noncallable, sinking fund debenture: Principal: $1,000,Coupon rate of interest: 8 percent,Term to maturity: 12 years,Sinking fund: 3

You are given the following information concerning a noncallable, sinking fund debenture:

  • Principal: $1,000,Coupon rate of interest: 8 percent,Term to maturity: 12 years,Sinking fund: 3 percent of outstanding bonds retired annually; the balance at maturity
  1. If you buy the bond today at its face amount and interest rates rise to 13 percent after four years have passed, what is your capital gain or loss? Assume that the bond pays interest annually.
  2. What proportion of the total debt issue is retired by the sinking fund?
  3. 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 8 percent on the invested funds?

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