1) Vancouver Development Company has just sold a= $100 million, 10 years, 12% bond issue. A sinking fund will retire issue over its life. Sinking fund payments are of equal amounts and will be made semi-annually, and proceeds will be to retire bonds. Bonds can be called at par for sinking fund purpose, or funds paid in to sinking fund can be use to buy bonds in open market.
i) How large must each semi-annual sinking fund payment be?
ii) What will occur, under conditions of problem thus far, to company’s debt service requirements per year for this issue overtime?
iii) Now assume Vancouver development set up its sinking fund so that equal annual amounts, payable at end of each year, are paid in to sinking fund held by bank, with carry on being used to buy government bonds that pay 9% interest. Payments, plus accrued interest, must total= $100 million at the end of 10 years, and proceeds will be used to retire bonds at that time. How long should the annual sinking fund payment be?
iv) What are the annual cash requirement for covering bond services cost under trusteeship arrangements describeed in part iii?
v) When would company buy bonds on open market rather than call them under original sinking fund plan?