QUESTION TWO The directors of a company authorized the issuance of Ksh30,000,000/= of serial bonds on September, 1993

Issued Amount = Ksh 30,000,000 issued in Sept ember 1993

Coupon rate = 9% (annual)

Indenture provisions:-

Ksh 5,000,000 of the issue to be redeemed on Sept 1, 1998 (Taking this once since total issue size won't add up)

Ksh 10,000,000 of the issue to be redeemed on Sept 1, 2003

Ksh 15,000,000 of the issue to be redeemed on Sept 1, 2007

Purchase price of the issue on Sept 1, 1998

Coupon = Coupon rate x Issue Size

Coupon = 9% * Ksh 30,000,000

Coupon = Ksh 2,7000,000

a.Purchase price on 1st Sept 1993

Issue Price =  (Coupon / (1 + yield)^year ) + Face Value / (1 + yield)^year

Issue Price = Ksh 2,7000,000 / (1 + 8%)¹ + Ksh 2,7000,000  / (1 + 8%)² + ......+ Ksh 2,7000,000  / (1 + 8%)¹⁴

+ Ksh 30,000,000 / (1 + 8%)¹⁴

Issue Price = Ksh 32,473,271.09

Purchase Price on Sept 1, 1993 = Ksh 32,473,271.09

b.Value of the bond on 1st Sept, 2000

Remaining Issue size = Issue size at inception - Redeemed issue

Remaining Issue size = Ksh 30,0000 -Ksh 5,000,000

Remaining Issue size= Ksh 25,000,000

Coupon = Coupon rate x Remaining Issue Size

Coupon = Ksh 25,000,000 * 9% = Ksh 2,250,000

Bond Price =  (Coupon / (1 + yield)^year ) + Face Value / (1 + yield)^year

Bond Price = Ksh 2,250,000/ (1 + 8%)¹ + Ksh 2,250,000/ (1 + 8%)² + ......+ Ksh 2,250,000/ (1 + 8%)⁷

+ Ksh 25,000,000 / (1 + 8%)⁷

Bond Price = Ksh 26,301,592.51

Value of the bond on 1st Sept, 2000 = Ksh 26,301,592.51