Chapter 21: Long–Term Debt
21.1
21.1
When you purchase a bond on a day other than a coupon payment date, there will be an
adjustment in the actual price paid.
Since coupons are paid in arrears, you can think of them
as earned monthly, but paid at the end of each 6–month period.
Therefore, if you buy a bond
during
any 6–month period, at the end of that period you will receive a coupon for some
months you did not "earn."
Those months of coupon must be paid to the one who earned
them –– the seller, and you make that payment at the time you buy the bond.
In each of the following, the rate is 6%, so the monthly interest is 6% / 12 = 0.5%.
Since the
bonds are trading at 100 (or 100% of par), you will pay
%)
5
.
0
(
%
100
Pr
N
ice
+
=
where
N
is the number of months since the last coupon payment.
a.
If you purchase the bond on March 1, you owe the seller two months of interest.
Therefore, N=2, and the price is:
%
101
%)
5
.
0
(
2
%
100
Pr
=
+
=
ice
If the face value of the bonds is $1,000, then you will pay $1,000 + $1,000 (0.01) =
$1,010.00.
b.
If you purchase the bond on October 1, you owe the seller three months of interest.
Therefore, N=3, and the price is
%
5
.
101
%)
5
.
0
(
3
%
100
Pr
=
+
=
ice
If the face value of the bonds is $1,000, then you will pay $1,000 + $1,000 (0.015) =
$1,015.
c.
Since July 1 is an interest payment date, there is no accrued interest on the bonds.
If
today is July 1, you will pay 100% of the face value for the bond.
If the face value of
the bonds is $1,000, then you will pay $1,000.
d.
If you purchase the bond on August 15, you owe the seller six weeks (1 1/2 months)
of interest.
Therefore, N=1.50, and the price is
%
75
.
100
%)
5
.
0
(
5
.
1
%
100
Pr
=
+
=
ice
If the face value of the bonds is $1,000, then you will pay $1,000 + $1,000 (0.0075) =
$1,007.50.
21.2
Sinking funds provide additional security to bonds.
If a firm is experiencing financial
difficulty, it is likely to have trouble making its sinking fund payments.
Thus, the sinking
fund provides an early warning system to the bondholders about the quality of the bonds.
Answers to End–of–Chapter Problems
B–
63