What will be the market price for the bonds? Which of the two methods should Company use to meet the current sinking-fund payment due shortly?
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Company has outstanding an issue of 9% sinking-fund debentures which requires an annual sinking- fund payment of $4 million per year. This requirement maybe met either by 1-presenting to the trustee on or before a specified date each year cash in the amount of $4 million; or else
2-instructing the trustee to enter the financial markets and purchase for Company's account enough bonds to equal a face value of $4 million, which it will then cancel and retire. The same number of bonds will be retired in either case.
In the first case, the bonds will be retired at face value. In the second, the bonds will be purchased from the market.
a) Each bond has a face value of $100, pays interest once per year, and has 5 years left to maturity. Presently,the bonds are trading in the market with a yield to maturity of 12.0 percent. What will be the market price for the bonds?
b) Enough bonds must be retired to satisfy the $4,000,000 sinking-fund requirement--by having the trustee either retire the appropriate number of bonds at face value or else purchase that number of bonds in the market to be cancelled at market price. Which of the two methods should Company use to meet the current sinking-fund payment due shortly?
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