Problem: A company decides to issue 10,000 bonds with a 10-year maturity and a 6% coupon rate. The bond has a face value of $1,000 and pays semi-annual coupons. The market requires an effective yield to maturity on a bond with similar risk of 7%.
Q1. What is the fair price of the bond?
In order to be able to pay the total face value back in 10 years, the company decides to use a sinking fund in which it will make semi-annual payments that would serve to accumulate the total face value. The sinking fund pays an interest rate of 3% compounded semi-annually.
Q2. What is the semi-annual payment the company must make to the sinking fund?
Q3. What is the total semi-annual cash outflow for the company?