Sinking fund payments for issue of debentures

Carter Manufacturing Company has outstanding an issue of 9 percent sinking-fund debentures which requires an annual sinking-fund payment of $4 million per year. This requirement may be met either by: presenting to the trustee on or before a specified date each year cash in the amount of $4 million; or else instructing the trustee to enter the financial markets and purchase for Carters account enough bonds to equal a face value of $4 million, which it will then cancel and retire.

The same number of bonds will be retired in either case. In the first case, the bonds will be acquired and retired at face value. In the second, the bonds to be retired will be purchased from the market at market price.

Each bond has a face value of $1000, pays interest once per year, and has five years left to maturity. Presently, the bonds are trading in the market with a yield to maturity of 12.0 percent. What will the market price of the bonds be?

Enough bonds must be retired to satisfy the $4,000,000 sinking fund requirement- either by having the trustee acquires the 4,000 bonds to be retired at their $1,000 face value (par value) or else purchase the 4,000 bonds to be retired in the ce. Which of the two methods should Carter use to meet the current sinking-fund payment due shortly?