ScanSoft Development Company is developing a new process tomanufacture optical disks. The development costs were higher thanexpected, so ScanSoft required an immediate cash inflow of $5 200000. To raise the required capital, the company decided to issuebonds. Since ScanSoft had no expertise in issuing and sellingbonds, the company decided to work with an investment dealer. Theinvestment dealer bought the company's entire bond issue at adiscount, and then planned to sell the bonds to the public at facevalue or the current market value. To ensure it would raise the $5200 000 it required, ScanSoft issued 5200 bonds with a face valueof $1000 each on January 20,2016. Interest is paid semi-annually onJuly 20 and January 20, beginning July 20, 2016. The bonds payinterest at 5.5% compounded semi-annually.
ScanSoft directors realize that when the bonds mature onJanuary 20, 2036, there must be $5 200 000 available to repay thebondholders. To have enough money on hand to meet this obligation,the directors set up a sinking fund using a specially designatedsavings account. The company earns interest of 1.6% compoundedsemi-annually on this sinking fund account. The directors beganmaking semi-annual payments to the sinking fund on July 20,2016.
ScanSoft Development Company issued the bonds, sold them allto the investment
dealer, and used the money raised to continue its research anddevelopment.
QUESTIONS
1. How much would an investor have to pay for one of thesebonds 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 sinkingfund 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 canearn 2.5% interest compounded semi-annually on its sinking fundaccount.
(a) What is the balance in the sinking fund after the January20, 2026, sinking fund payment?
(b) What is the new sinking fund payment if the fund begins toearn 2.5% on January 21, 2026?
(c) What will be the total amount deposited into the sinkingfund account over the life of the bonds?
(d) How much of the sinking fund will then be interest?
