- 6 Marks
FM – Nov 2019 – L2 – Q3b – Sources of finance: debt
Calculate the even amount to be deposited into a sinking fund to redeem bonds at maturity.
Question
Wobete Ltd is offering 5 million units of 15-year bonds with a face value of GH¢100 each. Though the bonds are being offered at a price of GH¢95 each, the bonds will be redeemed at a premium of 10%. The annual coupon rate of the bonds is 15%. Interest is payable at the end of every six months.
A provision in the bond indenture requires that Wobete Ltd establishes a sinking fund to accumulate enough money to pay the total redemption value of the bonds upon maturity. To comply with this provision, Wobete Ltd plans to set aside an even amount at the end of each quarter over the next 15 years. Each of the even amounts that will be set aside will be invested at an annual interest rate of 12% with quarterly compounding.
Required:
Calculate the even amount that should be put into the sinking fund at the end of each quarter to raise enough money to pay the total redemption value of the bonds. (6 marks)
Find Related Questions by Tags, levels, etc.
- Tags: Bond Valuation, Redemption Value, Sinking Fund
- Level: Level 2
- Topic: Sources of finance: debt
- Series: NOV 2019