Q1) Carter Manufacturing Company has outstanding the issue of 9% sinking-fund debentures that needs annual sinking-fund payment of $4 million per year. This needs may be met either by: presenting to trustee on or before a specified date each year cash in amount of $4 million; or else instructing the trustee to enter financial markets and purchase for Carters account enough bonds to equal a face value of $4 million, which it will then cancel and retire.
Same number of bonds will be retired in either case. In first case, bonds will be acquired and retired at face value. In second, bonds to be retired will be bought from market at market price.
Each bond has face value of $1000, pays interest once per year, and has five years left to maturity. Currently, bonds are trading in market with a yield to maturity of 12.0 percent. Determine market price of the bonds be?
Enough bonds should be retired to satisfy $4,000,000 sinking fund requirement- either by having trustee acquires 4,000 bonds to be retired at their $1,000 face value (par value) or else purchase 4,000 bonds to be retired in the ce. Which of the two methods must Carter use to meet present sinking-fund payment due shortly?