# Finance Bond valuation - computation of NIC and TIC

Document Sample

Sub: Finance                                                                            Topic: Bond Valuation

Question:
Statement showing the computation of NIC and TIC.

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On January 1, 2006, Central City issued a 20-year serial bond to finance improvements to the
water distribution system. A total of \$80,000,000 face values of bonds were issued with coupon
and maturity rates as follows:

December 31-Dec-10 3.00% \$5,000,000

December 31-Dec-15 3.50% \$5,000,000

December 31,2020         4.00% \$10,000,000

December 31-Dec-21 4.10% \$10,000,000

December 31-Dec-22 4.20% \$10,000,000

December 31-Dec-23 4.30% \$10,000,000

December 31-Dec-24 4.40% \$15,000,000

December 31-Dec-25 4.50% \$15,000,000

Cental City received \$80,500,000 from the bond issue. Use a spreadsheet program to find the
NIC and TIC interest rates for the bond issue. What would the values for NIC and TIC be if the
interest rate were 4.2 percent for the bonds with a maturity before 2020 and 5 percent for the
bonds with a maturity of 2020 or later?

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Sub: Finance                                                                            Topic: Bond Valuation

Solution:

a)          Date of Issue 1-Jan-06

Summary of Bonds issue:

Sl No. Maturity Dates           Coupon Rates        Face Value

1          31-Dec-10                 3.0%      \$5,000,000

2          31-Dec-15                 3.5%      \$5,000,000

3          31-Dec-20                 4.0% \$10,000,000

4          31-Dec-21                 4.1% \$10,000,000

5          31-Dec-22                 4.2% \$10,000,000

6          31-Dec-23                 4.3% \$10,000,000

7          31-Dec-24                 4.4% \$15,000,000

8          31-Dec-25                 4.5% \$15,000,000

Total                 \$80,000,000

Statement showing the computation of NIC

Sl Maturity         Coupon        Face       Number of years to Face Value times years to               Total Interest (b
No. Dates (a)       Rates (b)     Value (c ) maturity (d)       maturity (c X d)                        X c X d)

\$5,000,0
1 31-Dec-10          3.00%      00                               5                   \$25,000,000           \$750,000

\$5,000,0
2 31-Dec-15          3.50%      00                             10                    \$50,000,000         \$1,750,000

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Sub: Finance                                                                            Topic: Bond Valuation
\$10,000,
3 31-Dec-20              4.00%     000                           15                    \$150,000,000        \$6,000,000

\$10,000,
4 31-Dec-21              4.10%     000                           16                    \$160,000,000        \$6,560,000

\$10,000,
5 31-Dec-22              4.20%     000                           17                    \$170,000,000        \$7,140,000

\$10,000,
6 31-Dec-23              4.30%     000                           18                    \$180,000,000        \$7,740,000

\$15,000,
7 31-Dec-24              4.40%     000                           19                    \$285,000,000      \$12,540,000

\$15,000,
8 31-Dec-25              4.50%     000                           20                    \$300,000,000      \$13,500,000

\$80,000,
Total              000                                              \$1,320,000,000      \$55,980,000

NIC       4.24%

Statement showing the computation of TIC

Years                            1-Jan-05      31-Dec-06        31-Dec-07       31-Dec-08       31-Dec-09      31-Dec-10

Proceeds from bond           \$80,000,000.
issue                                  00            \$0.00           \$0.00              \$0.00       \$0.00           \$0.00

Interest from Bond 1                 \$0.00 -\$150,000.00 -\$150,000.00 -\$150,000.00 -\$150,000.00 -\$150,000.00

-
\$5,000,000.0
Redemption of Bond 1                 \$0.00           \$0.00           \$0.00              \$0.00       \$0.00            0

Interest from Bond 2                 \$0.00 -\$175,000.00 -\$175,000.00 -\$175,000.00 -\$175,000.00 -\$175,000.00

Redemption of Bond 2                 \$0.00           \$0.00           \$0.00              \$0.00       \$0.00           \$0.00

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Sub: Finance                                                                            Topic: Bond Valuation
Interest from Bond 3                 \$0.00 -\$400,000.00 -\$400,000.00 -\$400,000.00 -\$400,000.00 -\$400,000.00

Redemption of Bond 3                 \$0.00           \$0.00           \$0.00              \$0.00       \$0.00           \$0.00

Interest from Bond 4                 \$0.00 -\$410,000.00 -\$410,000.00 -\$410,000.00 -\$410,000.00 -\$410,000.00

Redemption of Bond 4                 \$0.00           \$0.00           \$0.00              \$0.00       \$0.00           \$0.00

Interest from Bond 5                 \$

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Description: Calculation of values of bonds with coupon issue and maturity rates - Statement showing the computation of NIC and TIC
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