Tut03qsdsd - July 2009 Strictly for course AB102 (2009)...

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July 2009 Strictly for course AB102 (2009) internal circulation only. Nanyang Business School AB102 Financial Management Tutorial 3: Bonds and their Valuation (Common Questions) 1) (ST-3) Sinking fund . The Vancouver Development Company (VDC) is planning to sell a $100 million, 10-year, 12 percent, annual 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 sufficient to retire 10 percent 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 either be purchased in the open market or obtained by calling up to 10 percent of the original issue at par, at VDC’s option. a) How large must each sinking fund payment be if the company (1) uses the option to call bonds at par or (2) decides to buy bonds on the open market? For part (2), you can only answer in words. b) What will happen to debt service requirements per year associated with this issue over its 10- year life? c) Now consider an alternative plan, where VDC sets up its sinking fund so that
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Tut03qsdsd - July 2009 Strictly for course AB102 (2009)...

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