How large must each sinking fund payment be

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Question - The Valencia Development Company (VDC) is planning to sell a P100,000,000, 10-year, 12%, semiannual 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 enough to retire 10% 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 be purchased on the open market or obtained by calling up to 5% of the original issue at par, at VDC's option.

a) How large must each sinking fund payment be if the company uses the option to call bonds at par?

b) How large must each sinking fund payment be if the company decides to buy bonds on the open market?

Reference no: EM132935051

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