ScanSoft Development Company is developing a new process to manufacture optical disks. The development costs were higher...

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Finance

ScanSoft Development Company is developing
a new process to manufacture optical disks.
The development costs were higher than
expected, so ScanSoft required an immediate
cash inflow of $5 200 000. To raise the required
capital, the company decided to issue bonds.
Since ScanSoft had no expertise in issuing and
selling bonds, the company decided to work
with an investment dealer. The investment
dealer bought the company's entire bond issue
at a discount, and then planned to sell the
bonds to the public at face value or the current
market value. To ensure it would raise the $5
200 000 it required, ScanSoft issued 5200
bonds with a face value of $1000 each on
January 20,2016. Interest is paid semi-annually
on July 20 and January 20, beginning July 20,
2016. The bonds pay interest at 5.5%
compounded semi-annually

ScanSoft directors realize that when the bonds
mature on January 20, 2036, there must be $5
200 000 available to repay the bondholders. To
have enough money on hand to meet this
obligation, the directors set up a sinking fund
using a specially designated savings account.
The company earns interest of 1.6%
compounded semi-annually on this sinking fund
account. The directors began making semi
annual payments to the sinking fund on July 20,
2016

ScanSoft Development Company issued the
bonds, sold them all to the investment
dealer, and used the money raised to continue
its research and development.

QUESTIONS

1. How much would an investor have to pay for
one of these bonds to earn 4.4%
compounded semi-annually?

2. (a) What is the size of the sinking fund
payment?
b) What will be the total amount deposited into
the sinking fund account would be by January
2036?
c) How much of the sinking fund will be
interest?

3. Suppose ScanSoft discovers on January 20,
2026, that it can earn 2.5% interest
compounded semi-annually on its sinking fund
account
a) What is the balance in the sinking fund after
the January 20, 2026, sinking fund payment?
b) What is the new sinking fund payment if the
fund begins to earn 2.5% on January 21, 2026?
c) What will be the total amount deposited into
the sinking fund account over the life of the bonds?

Answer & Explanation Solved by verified expert

4.2 Ratings (588 Votes)

1 The amount paid for the bond to earn 44 yield YTM compounded semiannually is calculated using PV function in Excel rate 44 2 converting annual rate into semiannual rate nper 20 2 total number See Answer

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Transcribed Image Text

ScanSoft Development Company is developinga new process to manufacture optical disks.The development costs were higher thanexpected, so ScanSoft required an immediatecash inflow of $5 200 000. To raise the requiredcapital, the company decided to issue bonds.Since ScanSoft had no expertise in issuing andselling bonds, the company decided to workwith an investment dealer. The investmentdealer bought the company's entire bond issueat a discount, and then planned to sell thebonds to the public at face value or the currentmarket value. To ensure it would raise the $5200 000 it required, ScanSoft issued 5200bonds with a face value of $1000 each onJanuary 20,2016. Interest is paid semi-annuallyon July 20 and January 20, beginning July 20,2016. The bonds pay interest at 5.5%compounded semi-annuallyScanSoft directors realize that when the bondsmature on January 20, 2036, there must be $5200 000 available to repay the bondholders. Tohave enough money on hand to meet thisobligation, the directors set up a sinking fundusing a specially designated savings account.The company earns interest of 1.6%compounded semi-annually on this sinking fundaccount. The directors began making semiannual payments to the sinking fund on July 20,2016ScanSoft Development Company issued thebonds, sold them all to the investmentdealer, and used the money raised to continueits research and development.QUESTIONS1. How much would an investor have to pay forone of these bonds to earn 4.4%compounded semi-annually?2. (a) What is the size of the sinking fundpayment?b) What will be the total amount deposited intothe sinking fund account would be by January2036?c) How much of the sinking fund will beinterest?3. Suppose ScanSoft discovers on January 20,2026, that it can earn 2.5% interestcompounded semi-annually on its sinking fundaccounta) What is the balance in the sinking fund afterthe January 20, 2026, sinking fund payment?b) What is the new sinking fund payment if thefund begins to earn 2.5% on January 21, 2026?c) What will be the total amount deposited intothe sinking fund account over the life of the bonds?