Question

A corporation wishes to raise capital by selling sinking fund debentures through the agency of a syndicate of investment bankers who agree to market and underwrite the securities for a commission fee of 3 percent of the nominal capital. Debentures are bonds unsecured by any specific property. The investment banker guarantees to sell the entire issue at the stated price. The debentures mature and are due at face value after a stated number of years. The sinking fund refers to the method the corporation wishes to employ to accumulate the redemption value of the bonds at maturity a separate fund is established into which the corporation makes annual deposits so that the accrued sum will just match the total redemption value The nominal capital the corporation wishes to raise is $300 million, with 300,000 debentures, each with a 30 year maturity value of $1000. The debentures are priced to sell for S994, and an annual interest payment of $79.88 will accrue to the owner of each bond. The sinking fund will earn interest at 8.15% (discrete annual compounding). The investment bankers agree to accept their commission in five equal annual payments at 1 percent interest, with the first payment to be made at the end of the year during which the securities are issued a) From the point of vie of the buyer, what is the yield to maturity of the b) Compute the annual payments that the corporation will be required to make for c) From the point of view of the corporation, what is the interest rate paid on the capital debentures, i.e., what is the interest rate they are earning? bond interest, sinking fund payments, and interest payments raised?

Answer 1

1 -Calculation of Yield to Maturity -:

$h7WlRoyaQAAAABJRU5ErkJggg==$

Where,                                      

C =$ 79.88      , F=$1000         , P=$1000    , N=30 Years

By putting the value in formula we get YTM=8.04%

A bond that pays 1 coupon(s) of 7.99% per year, that has a market value of $994.00, and that matures in 30 years will have a yield to maturity of 8.04%.

2-:Calculation of Annual payments for bond interest ,sinking fund payments, interest payment.

A-Bond Interest- Interest to paid on single bond=$79.88

                              Total No of bonds=300000

Annual total Interest=79.88*300000 =$23.964 Million