The Valencia Development Company (VDC) is planning to sell a P100,000,000, 10-year, 12%, semiannual payment bond issue. Provisions for a sinking fund to retire the issue over its life will be included in the indenture. Sinking fund payments will be made at the end of each year, and each payment must be enough to retire 10% of the original amount of the issue. The last sinking fund payment will retire the last of the bonds. The bonds to be retired each period can be purchased on the open market or obtained by calling up to 5% of the original issue at par, at VDC’s option. How large must each sinking fund payment be if the company uses the option to call bonds at par? How large must each sinking fund payment be if the company decides to buy bonds on the open market? (You can only answer in words.)
The Valencia Development Company (VDC) is planning to sell a P100,000,000, 10-year, 12%, semiannual payment bond issue. Provisions for a sinking fund to retire the issue over its life will be included in the indenture. Sinking fund payments will be made at the end of each year, and each payment must be enough to retire 10% of the original amount of the issue. The last sinking fund payment will retire the last of the bonds. The bonds to be retired each period can be purchased on the open market or obtained by calling up to 5% of the original issue at par, at VDC’s option. How large must each sinking fund payment be if the company uses the option to call bonds at par? How large must each sinking fund payment be if the company decides to buy bonds on the open market? (You can only answer in words.)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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The Valencia Development Company (VDC) is planning to sell a P100,000,000, 10-year, 12%, semiannual payment bond issue. Provisions for a sinking fund to retire the issue over its life will be included in the indenture. Sinking fund payments will be made at the end of each year, and each payment must be enough to retire 10% of the original amount of the issue. The last sinking fund payment will retire the last of the bonds. The bonds to be retired each period can be purchased on the open market or obtained by calling up to 5% of the original issue at par, at VDC’s option.
- How large must each sinking fund payment be if the company uses the option to call bonds at par?
- How large must each sinking fund payment be if the company decides to buy bonds on the open market?
(You can only answer in words.)
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