10 years ago, the City of Melrose issued $3,000,000 of 8% coupon, 30-year, semia
ID: 2709225 • Letter: 1
Question
10 years ago, the City of Melrose issued $3,000,000 of 8% coupon, 30-year, semiannual payment, tax-exempt muni bonds. The bonds had 10 years of call protection, but now the bonds can be called if the city chooses to do so. The call premium would be 6% of the face amount. New 20-year, 6%, semiannual payment bonds can be sold at par, but flotation costs on this issue would be 2% of the amount of bonds sold. What is the net present value of the refunding? Note that cities pay no income taxes, hence taxes are not relevant.
$453,443
$476,115
$499,921
$524,917
$551,163
Explanation / Answer
a. $453,443
Cost of refunding:
PV of savings, 40 periods @ new rate/2 = $693,443
NPV of refunding = PV of savings – Cost of refunding = $453,443
Call premium: 6% Old rate: 8% Flotation %: 2% New rate: 6% Amount: $3,000,000 Years: 20Related Questions
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