Question

You are given the following information concerning a noncallable, sinking fund debenture: • Principal: $1,000 • Coupon rate of interest: 8 percent • Term to maturity: 14 years • Sinking fund: 4 percent of outstanding bonds retired annually; the balance at maturity a. If you buy the bond today at its face amount and interest rates rise to 13 percent after five years have passed, what is your capital gain or loss? Assume that the bond pays interest annually. Use Appendix B and Appendix D to answer the question. Use a minus sign to enter the loss amount, if any, as a negative value. Round your answer to the nearest dollar. b. If you hold the bond 14 years, what do you receive at maturity? Principal c. What is the bond's current yield as of right now? Round your answer to the - nearest whole number. % d. Given your price in a, what is the yield at maturity? Round your answer to the nearest whole number. e. What proportion of the total debt issue is retired by the sinking fund? Round your answer to the nearest whole number X % Problem 13-10 You are given the following information concerning a noncallable, sinking fund debenture: Principal: $1,000 • Coupon rate of interest: 8 percent • Term to maturity: 14 years • Sinking fund: 4 percent of outstanding bonds retired annually; the balance at maturity a. If you buy the bond today at its face amount and interest rates rise to 13 percent after five years have passed, what is your capital gain or loss? Assume that the bond pays interest annually. Use Appendix B and Appendix D to answer the question. Use a minus sign to enter the loss amount, if any, as a negative value. Round your answer to the nearest dollar. b. If you hold the bond 14 years, what do you receive at maturity? Principal C. What is the bond's current yield as of right now? Round your answer to the nearest whole number. d. Given your price in a, what is the yield at maturity? Round your answer to the nearest whole number. 0 e. What proportion of the total debt issue is retired by the sinking fund? Round your answer to the nearest whole number.

Answer 1

The investment in a noncallable, sinking fund debenture is affected by rising interest rates, resulting in a capital loss. Upon maturity after 14 years, the principal is returned, and the current yield initially is 8%. A significant percentage of the bond is retired annually by the sinking fund.

Step-by-step explanation:

When considering an investment in a noncallable, sinking fund debenture with a principal of $1,000 and a coupon rate of 8%, investors must calculate various yields and returns, especially if market interest rates change.

If interest rates rise to 13% after five years, the bond's price will be less than its face value because bonds paying lower interest rates become less valuable as new bonds available in the market pay higher rates. In this scenario, the capital loss can be calculated using the present value of the expected bond payments discounted at the new interest rate.

At maturity, if the bond is held for 14 years, the bondholder receives the principal amount of $1,000. The current yield is the annual coupon payment divided by the price of the bond, which in this case, would be its face value, resulting in a current yield of 8%. The yield at maturity would consider the total returns, including interest payments and capital gains or losses.

The proportion of the total debt retired by the sinking fund over its term can be calculated by adding the annual retirement rate over the life of the bond. If 4% of outstanding bonds are retired annually, over 14 years, this would total to a significant percentage of the initial debt issue being retired by the sinking fund.