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Methods of Bond Retirement: A Periodic Deposit To The Sinking Fund

The document discusses different methods for evaluating potential investments and business decisions: 1. The Rate of Return (ROR) method compares the expected return of an investment to the desired return. Investments with returns higher than desired are justified. 2. The Annual Worth (AW) method considers interest on the original investment as a cost. Investments where annual cash inflows exceed outflows are justified. 3. The Present Worth (PW) method considers the present value of net cash flows. Investments where present worth is positive are justified. 4. The Future Worth (FW) method is similar but compounds cash flows to a future point. Positive future worth justifies the investment. 5. The

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544 views

Methods of Bond Retirement: A Periodic Deposit To The Sinking Fund

The document discusses different methods for evaluating potential investments and business decisions: 1. The Rate of Return (ROR) method compares the expected return of an investment to the desired return. Investments with returns higher than desired are justified. 2. The Annual Worth (AW) method considers interest on the original investment as a cost. Investments where annual cash inflows exceed outflows are justified. 3. The Present Worth (PW) method considers the present value of net cash flows. Investments where present worth is positive are justified. 4. The Future Worth (FW) method is similar but compounds cash flows to a future point. Positive future worth justifies the investment. 5. The

Uploaded by

Karen De Vera
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Sunday, September 19, 2021 11:49 AM

Methods of Bond Retirement


1. The corporation may issue another set of bonds equal to the amount of bonds due for
redemption.
2. The corporation may set up a sinking fund into which periodic deposits of equal payments are
made. The accumulated amount in the sinking fund is equal to the amount needed to retire the
bonds at the time they are due.

Where
A = periodic deposit to the sinking fund
F = accumulated amount, the amount needed to retire the bond
i = rate of interest in the sinking fund
r = bond rate per period
I = interest on the bonds per period
A + I = total periodic expense

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Example
Sunday, September 19, 2021 11:51 AM

A bond issue of P200,000 in 10-year bonds, in 1,000 units, paying 16% nominal interest in
semiannual payments, must be retired by the use of a sinking fund that earns 12% compounded
semiannually. What is the total semiannual expense?

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Sunday, September 19, 2021 3:35 PM

Bond Value
The value of a bond is the present worth of all future amounts that are expected to be received
through ownership of the bond.

Where
F = face, or par value
C = redemption or disposal price (often equal to F)
r = bond rate per period
n = number of periods before redemption
i = investment rate or yield per period
P = value of the bond n periods before redemption

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Sunday, September 19, 2021 3:41 PM

Mr. Romualdo bought a bond having a face value of P1,000 for P970. The bond rate was 14%
nominal and interest payments were made to him semiannually for a total of 7 years. At the
end of the seventh year, he sold the bond to a friend at a price that resulted in a yield of 16%
nominal on his investment. What was the selling price?

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Monday, September 20, 2021 8:11 AM

A man wants to make 14% nominal interest compounded semi annually on a bond investment.
How much should the man be willing to pay now for a 12%, P10000 bond that will mature in 10
years and pays interest semi-annually?

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Thursday, September 23, 2021 9:09 AM

Start of module 4

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Selections in Present Economy
Sunday, September 19, 2021 7:48 AM

An electrical contractor has a job that should be completed in 100 days. At present, he has 80
men on the job and it is estimated that they will finish the work in 130 days. If of the 80 men, 50
are paid P190 a day, 25 at P220 a day, and 5 at P300 a day, and if for each day beyond the
original 100 days, the contractor has to pay P2,000 liquidated damages.
a). How many more men should the contractor add so he can complete the work on time.
b). If the additional men of 5 are paid P220 a day and the rest PP190 a day, would the contractor
save money by employing more men and not paying the fine?

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Sunday, September 19, 2021 11:06 AM

BASIC METHOD FOR MAKING ECONOMY STUDIES

Rate of Return(ROR) Method


It is a measure of the effectiveness of an investment of capital. It is a financial efficiency.

If ROR > than the desired ROR then the investment is justified.
If ROR < than the desired ROR then the investment is not justified.

The Annual Worth (AW) Method


In this method, interest on the original investment (sometimes called minimum required
profit) is included as a cost. If the excess of annual cash inflows over annual cash outflows is
not less than zero the proposed investment is justified - valid.

If AW is > zero, then the investment is justified.


If AW is < zero, then the investment is not justified.

The Present Worth(PW) Method


This pattern for economy studies is based on the concept of present worth. If the present
worth of the net cash flows is equal to, or greater than, zero, the project is justified
economically.

If PW is >zero, then the investment is justified.


If PW is <zero, then the investment is not justified.

The Future Worth(FW) Method


The future worth for making economy studies is exactly comparable to the present worth
method except that all cash inflows and outflows are compounded forward to a reference
point in time called the future. If the future worth of the net cash flows is equal to, or greater
than, zero, the project is justified economically.
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than, zero, the project is justified economically.

If FW is >zero, then the investment is justified.


If FW is <zero, then the investment is not justified.

The Payback (Payout) Period Method


The payback period is commonly defined as the length of time required to recover the first
cost of an investment from the net cash flow produced by that investment for an interest rate
of zero.

Note: In computing the total annual cost, depreciation will not be included because the
method does not consider the time value of money or interest. The use of the payback period
for making investment decisions should be avoided as it may produce misleading results.

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Sunday, September 19, 2021 11:13 AM

An investment of P270,000 can be made in a project that will produce a uniform annual
revenue of P185,400 for 5 years and then have a salvage value of 10% of the investment.
x
Out-of-pocket costs for operation and maintenance will be P81,000 per year. The company
expects capital to earn 25% before income taxes. Is this a desirable investment? What is the
payback period of the investment? with taxes and insurance 4% of the investment.>

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