Marie Snell recently inherited some bonds (face value R100 000) from her
father, and soon thereafter she became engaged to Sam Spade, a University of
Florida marketing graduate. Sam wants Marie to cash in the bonds so the two of
them can use the money to "live like royalty" for two years in Monte Carlo. The 2
percent annual coupon bonds mature on January 1, 2024, and it is now January 1,
2004. Interest on these bonds is paid annually on December 31 of each year,
and new annual coupon bonds with similar risk and maturity are currently yielding
12 percent. If Marie sells her bonds now and puts the proceeds into an account
which pays 10 percent compounded annually, what would be the largest equal
annual amounts she could withdraw for two years, beginning today?
2.6 Recently, Midrand Hospitals Inc. filed for bankruptcy. The firm was
reorganized as American Hospitals Inc., and the court permitted a new indenture on
an outstanding bond issue to be put into effect. The issue has 10 years to maturity and
a coupon rate of 10 percent, paid annually. The new agreement allows the firm to pay
no interest for 5 years. Then, interest payments will be resumed for the next 5 years.
Finally, at maturity (Year 10), the principal plus the interest that was not paid during
the first 5 years will be paid. However, no interest will be paid on the deferred interest.
If the required annual return is 20 percent, what should the bonds sell for in the market
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