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 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 or loss

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29 October, 00:44

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 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 or loss

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Gabriella Crane · Answer 1

A) If you buy the bond today at its face amount and interest rates rise to 12% after three years have passed what is your capital gain or loss?

B) If you hold the bond 15 years what do you recive at maturity?

C) What is the bond 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 to accumulate this sum if the firm is able to earn 7% on the invest funds.

A) If the interest rates rise to 12%, the price of the bond assuming semi-annual interest payments, will be

1000*pvif (6,24) + 35*pvifa (6,24)

= 1000*0.2470 + 35*12.5504

= 247 + 439.26 = $686.26

The capital gain would be 1000 - 686.26 = $313.74.

B) Bond face value is $1000 and coupon rate is 7%. Half yearly interest = 1000*7%/2 = $35.

Maturity value of $1000, plus half yearly interest of $35.

C) The bonds current yield = 7%, assuming the price of the bond is $1000 today.

D) The yield to maturity is 12%.

E) No, the bonds are not callable.

F) 5% of the bonds are retired every year. So 14 years * 5 = 70%. Balance 30% is paid full at EOY 15.

5%*14 = 70%.

G) Debentures are not secured by any specific asset.

H) It is not specified as to how the money would be invested; whether its a

lump sum invested on day 0 or equal amounts invested at each year end

If it a lump sum to be invested now, the amount should be 1000000/107^15 = $362,446

If it in equal amounts to be invested each year end the annual investments is given by 1,000,000/fvifa (7,15)

= 1000000/25.1290

= $3979.