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ScanSoft, the new company Hassan is going to work for, is developing a new process to manufacture optical disks. The development costs were higher than
ScanSoft, the new company Hassan is going to work for, is developing a new process to
manufacture optical disks. The development costs were higher than expected, so ScanSoft
requires an immediate cash inflow of $ To raise the required capital, the company
decided to issue bonds. Since ScanSoft had no expertise in issuing and selling bonds, Hassan
suggested that the company 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 $ it required,
ScanSoft plans to issue bonds with a face value of $ each, on January
Interest is paid semiannually on July and January beginning July The bonds pay
interest at compounded semiannually.
Hassan Mustafa realized that when the bonds mature on January there must be
$ available to repay the bondholders. To have enough money on hand to meet this
obligation, He suggested that ScanSoft set up a sinking fund an interestbearing account into
which payments are made at regular intervals to provide a desired sum of money at a specified
future time using a specially designated savings account. The company earns interest of
compounded semiannually on this sinking fund account. ScanSoft began making semiannual
payments to the sinking fund on July
ScanSoft issued the bonds, sold them all to the investment dealer, and used the money raised
to continue its research and development.
How much would an investor have to pay for one of these bonds to earn
compounded semiannually?
a What is the size of the sinking fund payments?
b What will be the total amount deposited into the sinking fund account would be by
January
c How much of the sinking fund will be interest?
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