CB 719: Construction Economics & Feasibility Study 2023

Lecture (8)
Bonds (cont.)
The reserve bank formula:
The Australian reserve bank developed a formula in order to calculate
the bond purchase prices issued by the government, as follow:
P = [1 / (1+i) f/d] *[ Next interest payment + I / (1+i) + I / (1+i)2 +
……. + (I + C)/ (1+i) n]
Where:
I = Interest periodic payment.
f = Number of days till next payment date.
d = Interest period on days.
n = Number of periodic interest periods till maturity.

This formula allowed the bond to be valued at any date during its term.
Noticing that, (Next interest payment) shown in the formula
sometimes may equal to zero, when the bond goes ex-interest.
As an example, for a bond purchased at a date precedes the date of the
next interest payment by 7 days, the new bond purchaser does not
receive this next interest payment, as it is the right of the old bond
holder. During these 7 days, the bond is ex-interest and is priced
accordingly.

Example (1):
A 100$ bond pays half-yearly interest of 8%, and to be redeemed at par
on 31 December 2005.
Calculate the bond purchase price at 15 May 1997, if the investor
targets a yield of 10% paid half-yearly, using the:
1. Reserve bank formula.
2. Traditional method.

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Solution:
I = 4/100*100 = 4$, n=17

1. Reserve bank formula:

At 15 May 1997, this bond is not ex-interest.
After the next interest payment, n = 17 till maturity.
Number of days from 15 May to 30 June = 46 day,
f/d = 46/181 = 0.254
P = [1 / (1+i) f/d] *[ Next interest payment + I / (1+i) + I / (1+i)2 +
……. + (I + C)/ (1+i) n]
P = [1 / (1+ 0.05) (46/181)] * [4 + 4 / (1+0.05) + 4 / (1+0.05)2 + ……. +
(100+4) / (1+ 0.05)17] = 91.58$
2. Traditional method:
P31 Dec.1997 = 4 / (1+0.05) + 4 / (1+0.05)2 + … + (100+4) / (1+0.05)18 =
89.67$
Pat 15 May 1997 = 89.67 * (1+0.05) (135/181) = 89.67*1.03 = 92.65$

Example (2):
A 1,000$ bond to be redeemed at 1,100$ on 7 November 2012 and has
11% annual interest coupons.
Calculate the bond purchase price on 18 April 2003, if there is a
desired annual yield of 15%. Use the reserve bank formula.

Solution:
I = 11/100*1,000 = 110$, n=9

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P = [1/(1+0.15) (203/365)]*[110 + 110/(1+0.15) + 110/(1+0.15)2 + ……+

(1,100 + 110) / (1+0.15)9] = 876.27$

- Taxation on bonds:
Till now the bond price or yield are discussed assuming that, the
investor receives full interest payment. Practically this is not true as,
the government already deducts portion from each interest payment as
an income tax and then, the investor receives the rest in other meaning
received a reduced interest payment amount known as net interest
payment and earns a net yield on his investment.
Therefore, any calculation for the bond price or yield must incorporate
an allowance for tax on the interest payments. On other hand, for no
taxed bonds a gross (pre-tax) interest payments are received and a
gross (pre-tax) yield is earned.
In order to include the tax allowance, the bond purchase price formula
is modified to be, as follow:
Pnet = (1- tr) * [ I/(1+i) + I/(1+i)2………. + I/(1+i) n] + C / (1+i) n
Where:
tr : Income tax rate.

Example (3):
A 100$ bond at 10% annual interest paid half-yearly and matures after
exactly twelve years. If the income tax rate is 30 cent/dollar, calculate
the bond purchase price that obtains:
a) 8% gross yield convertible half-yearly.
b) 8% net yield convertible half-yearly.

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Solution:
I = 5/100*100 = 5$, n=12*2=24

a) No tax,
Pgross = 5 / (1+0.04) + 5 / (1+0.04)2+……. + (100+5)/ (1+0.04)24 =
115.259$
b) Consider income tax rate,
Pnet = (1- 0.3) *[5/ (1+0.04) + 5/ (1+0.04)2…………. + 5/ (1+0.04)24] +
100/ (1+0.04)24 = 92.38$

Example (4):
An investor pays 30 cents/dollar income tax. He purchased a 100$ bond
that earns 11% annual interest convertible half-yearly. The bond is to
be redeemed at par after five years. If the bond is quoted into market
know for 102$, calculate the accurate net yield that the investor earns,
if the bond is held to maturity.

Solution:
I = 5.5/100*100 = 5.5$, n=5*2=10

first, the interest payment must be reduced to take the income tax into
consideration.
I = (1- 0.3) * 5.5 = 3.85$
Calculate the approximate yield,
i = [I + 1/n*(C-P)] / [0.5 * (C + P)]
= [3.85 + 1/10*(100-102)] / [0.5*(100+102)] = 0.03618 or 3.62%

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For accuracy, calculate P3.5%

P3.5% = 3.85/ (1+0.035) + 3.85 / (1+0.035)2+……. + 103.85/
(1+0.035)10 = 102.91$
P3.85% = 100$
Conduct interpolation,
(i - 0.035) / (0.0385 - 0.035) = (102 - 102.91) / (100 - 102.91)
i = 0.0361 or 3.61%

A second type of taxation is the capital gain tax, which is the tax paid
on the difference earned between the bond selling and purchasing
prices.
For instance, if a 100$ bond is redeemed at par & its purchase price
was 95$, then there is a capital gain of 5$ at the redemption date.
Consider 20% capital gain tax, means 1$ from the capital gain of 5$,
will be paid as a tax & the net redemption price will become 99$
instead of 100$.
Incorporating the gain tax into the bond pricing formula, results in:

P = [(I/(1+i) + I/(1+i)2+………. + (I + C) /(1+i) n] - [T*(C-P)/(1+i) n]

Where:
(C – P) = capital gain
T = capital gain tax rate

Example (5):
A 100$ bond pays 6% annual interest, is to be redeemed at par in ten
years. If the current yield into market is 7.5% annually, calculate:
a) Bond purchase price allowing 25% capital gain tax.
b) Re-calculate the bond purchase price, consider income tax &
capital gain tax rate of 25%.

Solution:
I = 6/100*100 = 6$, n=10

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a)
P = [(I/(1+i) + I/(1+i)2+……. + (I + C) /(1+i) n] - [T*(C-P)/(1+i) n]
P = [6/ (1+0.075) +6/ (1+0.075)2+………+ 106/ (1+0.075)10] -
[0.25*(100 - P)/ (1+0.075)10]
P = 77.601 + 0.121*P
P = 88.28$
b)
P = (1- tr) * [ I/(1+i) + I/(1+i)2……. + I/(1+i) n] + C / (1+i) n - [T*(C-
P)/(1+i) n]
P = (1- 0.25) *[6/ (1+0.075) + 6/ (1+0.075)2 +……+ 6/ (1+0.075)10] +
100/ (1+0.075)10 – [0.25*(100-P) / (1+0.075)10]
P = 67.2765 - 0.12129 * P
P = 76.56$

Example (6):
A 100$ bond has 10% annual interest, pays half-yearly interest and is
to be redeemed at par after seven years. If the bond is sold currently
into the market for 92$. Consider 25% capital gain tax, calculate the
yield of the bond till maturity.

Solution:
I = 5/100*100 = 5$, n=7*2=14

Capital gain = C – P = 100 - 92 = 8$

Capital gain tax = 0.25*8 = 2$
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Then, the redemption price after incorporating tax = 100 - 2 = 98$

Using, the approximate yield formula:
i = [I + 1/n (C - P)]/ [0.5*(C + P)]
= [5 + 1/14 (98 – 92)] / [0.5*(98 + 92)] = 0.0571 or 5.71%

For accuracy, calculate P of: i = 5.5% & 6%

P5.5% = 5/ (1+0.055) +5/ (1+0.055)2+……+(5+98)/ (1+0.055)14 =
94.26$
P6% = 5/ (1+0.06) +5/ (1+0.06)2+……+(5+98)/ (1+0.06)14 = 89.82$

Conduct linear interpolation for accuracy:

(i - 0.055) / (0.06 - 0.055) = (92 - 94.26) / (89.92 - 94.26)
i = 5.75% per half-year

Example (7):
A company issues a 10% annual interest six years bond redeemed at
105$ not at par and pays interest quarterly. Considering 20% capital
gain tax, calculate the quarterly yield earned by the bond purchaser.

Solution:
I = (2.5 / 100 * 100) = 2.5$, n=6*4=24

Calculate the approximate (i),

i= [I + 1/n*(C-P)] / [1/2*(C + P)]
= [2.5 + 1/24*(105 – 100)] / [1/2*(105 + 100)] = 0.0264 or 2.64%
For accuracy, calculate P(i=2.5%) & P(i=3%)
P = [(I/(1+i) + I/(1+i)2+………. +(I + C) /(1+i) n] – [T*(C-P)/(1+i) n]
P2.5% = [(2.5/ (1+0.025) + 2.5/ (1+0.025)2 +……+ (2.5 +
105)/(1+0.025)24] – [0.2*(105 – P) / (1 + 0.025)24]
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= 91.167 + 0.1106*P
P2.5% = 102.5$
P3.0% = [(2.5/ (1+0.03) + 2.5/ (1+0.03)2 +……+ [(2.5 + 105)/(1+0.03)24]
– [0.2*(105 – P) / (1 + 0.03)24]
P3.0% = 92.79$
Conducting linear interpolation,
(i - 0.025) / (0.03 – 0.025) = (100 – 102.5) / (92.79 – 102.5)
i= 0.0263 or 2.63%

Example (8):
An investor purchased a 100$ bond that has 8% annual interest and
pays half-yearly interest. If the bond is to be redeemed at par after
seventeen years for 90$. Considering 30% interest tax and 20% capital
gain tax, calculate the yield earned till maturity.

Solution:
I = 4/100*100 = 4$, n=17*2=34

Calculate approximate (i),

i= [I + 1/n*(C-P)] / [1/2*(C + P)]
= [4+1/34*(100-90)] / [0.5*(100+90)] = 0.0452 or 4.52%
Calculate P4% & P5%, taking the income tax & the capital gain tax into
consideration:
P = (1- tr) * [ I/(1+i) + I/(1+i)2……. + I/(1+i) n] + C / (1+i) n - [T*(C-
P)/(1+i) n]

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P4% = (1-0.3) *[4/ (1+0.04) + 4/ (1+0.04)2 + ………. + 4/ (1+0.04)34] +

100/ (1+0.04)34 – [0.2*(100- P)/ (1+0.04)34]
P4% = 76.73$
P5% = (1-0.3) *[4/ (1+0.05) + 4/ (1+0.05)2 + ………. + 4/ (1+0.05)34] +
100/ (1+0.05)34 – [0.2*(100- P)/ (1+0.05)34]
P5% = 62.93$
Conducting linear interpolation:
(i- 0.04) / (0.05 – 0.04) = (90 – 76.63) / (62.93 – 76.63)
i=0.0304 or 3.04%
Example (9):
A government bond has 9% interest paid half-yearly, is to be redeemed
at par on 30 June 2013. The bond was priced for 94.5$ immediately
after the interest payment dated on 31 December 2000.
Calculate, the bond yield till maturity for the investor who:
a) Pays no tax.
b) Pays 30% income tax.
c) Pays 30% income & 30% capital gain taxes.

Solution:
I = 4.5/100*100 = 4.5$, n=25

Calculate approximate (i),

i= [I+1/n*(C-P)] / [0.5*(C+P)]
= [4.5 + 1/25*(100 – 94.5)] / [0.5*(100 + 94.5)] = 0.0485 or 4.85%

For accuracy, P4.5% & P5.0% and, then conduct linear interpolation,

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a) Pays no tax:
P = I / (1+i) + I / (1+i)2 + …………. + (I + C) / (1+i) n
P4.5% = 4.5 / (1+0.045) + 4.5 / (1+0.045)2 + ……. + (100+4.5) /
(1+0.045)25 = 100$
P5.0% = 4.5 / (1+0.05) + 4.5 / (1+0.05)2 + …………. + (100+4.5) /
(1+0.05)25 = 92.95$
Conducting interpolation:
(i-0.045) / (0.05-0.045) = (94.5-100) / (92.95-100)
i=0.0489 or 4.89%
b) Income tax of 30%:
P = (1-tt) * [I / (1+i) + I / (1+i)2 + ………. + I / (1+i) n] + C / (1+i) n
P4.5% = 0.7*[4.5 / (1+0.045) + 4.5 / (1+0.045)2 + .. + 4.5 / (1+0.045)25]
+ 100 / (1+0.045)25 = 79.98$
P5.0% = 0.7*[4.5 / (1+0.05) + 4.5 / (1+0.05)2 + …….. + 4.5 / (1+0.05)25]
+ 100 / (1+0.05)25 = 73.93$
Conducting interpolation:
)i-0.045) / (0.05-0.045) = (94.5-79.98) / (73.93-79.98(
i=0.033 or 3.30%
c) Incorporating income & capital gain tax of 30%:
P = (1-tt) * [I / (1+i) + I / (1+i)2 + ………. + I / (1+i) n] + C / (1+i) n
– T*(C-P) / (1+i) n
P4.5% = 0.7*[4.5 / (1+0.045) + 4.5 / (1+0.045)2 +…. + 4.5 / (1+0.045)25]
+ 100/ (1+0.045)25 – 0.3*(100 – P) / (1+0.045)25
P4.5% = 77.68$
P5.0% = 0.7*[4.5 / (1+0.05) + 4.5 / (1+0.05)2 +.... + 4.5 / (1+0.05)25] +
100/ (1+0.05)25 – 0.3*(100 – P) / (1+0.05)25
P5.0% = 71.35$
Conducting interpolation:
)i-0.045) / (0.05-0.045) = (94.5-77.68) / (71.35-77.68)
i=0.0317 or 3.17%

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- Other forms of securities:

There is a wide range of securities available in the capital markets. The
pricing of these securities is a natural development from the bond
pricing. The following represent some of these securities:

1. Zero-coupon bonds:
Zero-coupon bonds offer the entire payment at maturity, zero-coupon
bonds tend to fluctuate in price, much more so than coupon bonds.
These bonds are issued at a deep discount and repay the par value, at
maturity. The payment received by the investor is equal to the principal
invested plus the interest earned, compounded at a stated yield.
For example, for a 20,000$ bond matures in 20 years with a desired
yield of 5.5%, if the bond purchase price is 6,855$. At the maturity date
the investor receives a face value of 20,000$.
The difference (20,000 - 6,855 = 13,145$) is the interest payments
compounded automatically till the bond maturity date.
The interest earned on a zero-coupon bond is an imputed
interest/phantom interest, which is subject to income tax. Although
there are no coupon payments made on until maturity, investors still
have to pay income taxes on the imputed interest that accrues each
year.

- Pricing a Zero-Coupon Bond

The price of a zero-coupon bond can be calculated using the equation:
P = C / (1 + i)n

where:
• C = Maturity value
• i = required interest rate
• n = number of years until maturity

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Example (10):
An investor desires to make a 6% return on a 25,000$ bond at par. The
bond is zero-coupon rate and matures after three years. Calculate the
bond purchase price.

Solution:
P = 25,000 / (1+0.06)3 = 20,991$.
The bond will be sold to the investor at a percentage from its face value
= 20,991 / 25,000 = 0.084 or 84%.
Then, at maturity the investor gain will be,
= 25,000 - 20,991 = 4,009$
This explains the 6% interest per year, taking into consideration that the
greater the term of the bond till maturity, the less the bond purchase
price.

Example (11):
Assume a zero-coupon bond pays 1,000$, matures after five years from
today. If the desired yield is 4.5%, calculate the bond purchase price.

Solution:
P = 1,000 / (1 + 0.045)5 = 802.45$.

Example (12):
Assume that, the bond purchase price calculated in Example (11) rises
up to 810$. Calculate the bond yield till maturity.

Solution:
P = C / (1 + i)n
Little mathematics shows that,
(1+i) = (P/C)(1/n)
i = (P/C)(1/n) – 1
= (1,000 / 810) (1/5) – 1 = 0.043 or 4.3%
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Example (13):
A 1,000$ bond matures after six years from now. The bond has 7%
coupon rate, paid interest semi-annually. Value the bond today if the
desired yield to maturity is 8.5%?

Solution:
I = 1,000*3.5/100 = 35$, n=2*6=12, i=4.25%

P = C/(1+i) n + I*(1/(1+i) +1/(1+i)2+1/(1+i)3+……. +1/(1+i) n)

=1,000/ (1+0.0425)12 + 35*(1/ (1+0.0425) + 1/ (1+0.0425)2+……+1/
(1+0.0425)12) = 930.62$

2. Indexed bonds:
The bond investor earns a fixed rate of return on his capital, and
the coupon rate determines the periodic interest payments which he
received later on.
However, due to inflation the real value of the earned cash flow
through the fixed coupon payments declines. Therefore, the index-
linked bonds are used to secure the purchasing power of the income
earned through bonds, in other meaning protect the income earned
against inflation.
Index-linked bonds are linked to the country’s inflation index
(Consumer Price Index CPI), in either two ways as follow:

1. The first: Adjusting the coupon rate as to match the inflation rate
and keeping the bond face value constant. This index known as the
C-linkers (coupon link) and is issued by commercial banks and/or
life insurance companies.
2. The second: Adjusting the principal according to inflation and then,
re-calculating the coupons using the adjusted principal. This index is
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known as the P-linkers (principal link) and is much used. It is

usually issued by the government.

Example (14):
A 1,000$ bond has 10% annual coupon rate and one year to maturity.
At issuance date, the Consumer Price Index (CPI) was 170. After the
year, the CPI becomes 175.
Describe the index-linked bond construction and arrive at real interest
rates.

Solution:
Step 1: Calculate the indexation factor and the inflation rate.
The indexation factor & the inflation rate are calculated as follow,
Indexation factor = CPI at Maturity / CPI at Issuance = 175 / 170
= 1.0294
Inflation Rate = (175 – 170) / 170 = 0.0294 or 2.94%
The percentage change in CPI confirms that inflation is 2.94%.

Step 2: Calculate the bond cash flow at maturity.

At maturity, the bond will pay the face value and the annual interest
payment.
Cash Flow at Maturity = Face value + Interest payment = 1,000 + 100
= 1,100$

Step 3: Calculate the adjusted cash flow at maturity.

Amount Received at Maturity = 1,100 * 1.0294 = 1,132.34$
This calculated amount includes: (Original face value (1,000$), annual
interest payment (100$), and the amount adjusted for inflation
(32.34$)).

Step 4: Calculate the nominal interest rate.

The nominal interest rate will be calculated as follow,

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Nominal interest rate = (Adjusted cash flow at maturity – maturity

value) / maturity value
Nominal interest rate = (1,132.34 – 1,000) / 1,000 = 13.23%

Step 5: Calculate the real interest rate.

The real interest rate will be calculated through as follow,
Real interest rate = Nominal interest Rate – inflation Rate
= 13.23% – 2.94% = 10.29%.

- Performance of Index-Linked Bonds vs. Regular Bonds

Investors choosing between regular and index-linked bonds that have
same maturity and credit risk, with consideration of the break-even
inflation rate.
The break-even inflation rate, is the inflation rate at which the
performance of an index-linked bond will be as good as the
performance of a comparable regular bond.
Break even inflation rate = (regular bond yield) – (index-linked bond yield)

If the actual inflation is higher than break-even inflation over the bond
life, then the investors will earn more on index-linked bonds than on
regular bonds. If the actual inflation is lower than break-even inflation,
the investors will earn less from index-linked bonds than from regular
bonds.
For example, if a regular bond yields 3% and an index-linked bond
yields 2%, the break-even inflation rate will be 1%. If the investor
expects inflation to be above 1% over the bond life, then the index-
linked bond will out-perform the regular bond.
If inflation equals 1%, then the regular and index-linked bond will
perform equally well.
If inflation falls below 1%, then the regular bond will out-perform the
inflation-linked bond.

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Example (15):
Considering two investors, one purchased a regular zero-coupon bond
and the other purchased a zero-coupon index-linked bond. If both
bonds are purchased for 100$ on July 2019 and having the same term
of one year till maturity with 4% coupon rate. The two bonds face
value is 100$ and the CPI level at time of issuance is 204 and on July
2020 is 207
Measure the two bonds performance.

Solution:
For the regular bond:
The interest payment = 4*100 = 4$ annually
At maturity the bond holder will be credited,
Payment = principal + interest payment due
= 100 + 4 = 104$
For the index-linked bond, on July 2020 both interest payment and
principal must be adjusted for inflation,
Calculate the indexation factor,
= 207/204 = 1.0147
Then, the inflation rate = 1.47%
The bond holder receives at maturity = (100 + 4)/1.0147 = 105.53$
Annual interest rate = (105.53 - 100)/100 = 0.0553 or 5.53%
Real interest rate = 5.53 - 1.47= 4.06%

3. Callable bonds:
Till know it is assumed that the maturity date of each bond is fixed.
However, some fixed interest securities contain a clause which permits
the borrower to redeem the loan, at a specified date or within a
specified period, prior to the redemption date. Bonds with these
optional redemption dates may be known as callable bonds.

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Then, with respect to the bond purchase price calculation and since the
bond term will not be changed, there will be a problem of how to
guarantee the desired yield.
The bond issuer controls the redemption date (call date) and then, the
investor must decide the price of purchasing the bond that guarantees
his desired yield regardless of the call date.

Example (16):
A company issues twenty years 1,000$ bond. The bond coupon rate is
11% convertible half-yearly interest. The bond is to be called at par
after fifteen years from now. Calculate the bond purchase price that
guarantees an investor a yield of:
a) 13% annually convertible half-yearly.
b) 9% annually convertible half-yearly.

Solution:
I = 55/100*100 = 55$, n= 20*2 = 40

a) The bond matures at the end of the 20 years, but it may be called at
after 15 years. The desired yield is 13% annually
Calculate the bond price at these two dates:
P15years = 55/ (1+0.065) + 55/ (1+0.065)2 + ….…… + (1,000+55)/
(1+0.065)30 = 869.41$
P20years = 55/ (1+0.065) + 55/ (1+0.065)2 + ….…… + (1,000+55)/
(1+0.065)40 = 858.54$
The bond purchase price which guarantees a 13% annual yield is the
least value from these two calculated values = (858.54$).

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If the bond is purchased by 858.54$ and runs the full duration of twenty
years to maturity, the investor's yield will be exactly 13%. But, if it
runs only the duration of 15 years, the investor's yield will be > 13%.

b)
P15years = 55/ (1+0.045) + 55/ (1+0.045)2+ …. + 1,055/ (1+0.045)30 =
1,162.89$
P20years = 55/ (1+0.045) + 55/ (1+0.045)2+ …. + 1,055/ (1+0.045)40 =
1,184.02$
The bond purchase price which guarantees 9% annual yield is less than
1,162.89$ regardless of the outcome, the investor's yield will be >= 9%
at this price.

Example (17):
A company issues twenty years 12% annual interest 1,000$ bond pays
half-yearly interest. If the bond can be callable after ten years for
1,100$ and also, after fifteen years for 1,050$.
Calculate, the bond purchase price that guarantees 11% annual yield for
the investor.

Solution:
I = 6/100*100 = 60$, n = 20*2 = 40

a) If bond called after 10 years

P = 60/ (1+0.055) + 60/ (1+0.055)2 +………+ (60+1,100)/ (1+0.055)20
=1,093.99$
b) If bond called after 15 years

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P = 60/ (1+0.055) + 60/ (1+0.055)2 +………+ (60+1,050)/ (1+0.055)30

=1,082.63$
c) If bond redeemed at par after its normal term of 20 years
P = 60/ (1+0.055) + 60/ (1+0.055)2 +………+ (60+1,000)/ (1+0.055)40
=1,080.18$
Despite the fact that the desired yield < coupon rate, chose the least
calculated purchase price, guarantees the investor desired yield
regardless the date of calling the bond.

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 CB 719: Construction Economics & Feasibility Study 2023

Sheet (8)
1. A 5,000$ bond paying interest of 11% half yearly is redeemable at
par in 20 years. It is callable at 105% of its face value in 15 years.
Find the price to guarantee a yield of:
• Annual interest 9% convertible half-yearly.
• Annual interest 9% convertible half-yearly.

2. A 100$ bond with coupons 11% convertible half-yearly is

redeemable at par in 20 years. It also has the following call options:
Call date Redemption values
15 years 105
16 years 104
17 years 103
18 years 102
19 years 101
Find the price to guarantee a yield of:
a) Annual interest 12% convertible half yearly.
b) Annual interest 10% convertible half yearly.

3. An investor purchases an 8 years 6% bond paying half-yearly interest

for nine years before maturity. The investor desires a yield 7% half-
yearly. After three years he sells the bond in the market at 5.5% half-
yearly interest. Calculate the yield he obtained from the investment.
Calculate the yield again, assuming 20% income tax and 30% capital
gains tax.

4. A city borrows 2,000,000$ to build a sewage treatment system, the

debt requires annual interest of 8% paid half-yearly. At the same time
a sinking fund is established that earns annual interest of 5% to re-
pay the debt in twenty-five years. Find the half-yearly expense of the
debt and the book value of the city's debt at the beginning of the year
sixteen.

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