Question
Tesla wants to raise $170 million to build a new factory. To do this, they issue a bond paying 13% maturing in 18 years. To
Tesla wants to raise $170 million to build a new factory. To do this, they issue a bond paying 13% maturing in 18 years. To guarantee that they will be able to repay the principal at maturity, the investors require TSLA to make annual deposits into a sinking fund that pays 5.75% (effective annual rate) that will grow to match the face value at maturity. The current interest rate is 6.75% compounded semi-annually. a) What face value of bonds must TSLA sell to raise their target amount? b) How much must they deposit each year into the sinking fund? c) After 9 years how much money is in the sinking fund? After 9 years, both the current interest rate and the sinking fund rate change by -1%. d) What is the value of the bonds after this rate change? e) What should TSLA change their payment to, so that they will still have exactly $170 in the sinking fund when the bond matures?
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