Many companies look to re-finance their outstanding debt when interest rates fal

Question

Many companies look to re-finance their outstanding debt when interest rates fall significantly. Javert Toy Company has $50.00 million in debt outstanding that pays an 9.00% APR coupon. The debt has an average maturity of 10.00 years. The firm can refinance at an annual rate of 5.25%. That is, investors want 5.25% today or bonds of similar risk and maturity How much will Javert Toy company pay to buy back its current outstanding bonds?(answer in terms of millions, so 1,000,000 would be 1.00) Answer Format: Currency: Round to: 2 decimal places. Enter Answer Here..

Explanation / Answer

Ans 1) Bond price = coupon * (1 - (1+r)^(-n))/r + FV/(1+r)^n

where coupon = 4.5 million

r = 5.25%

n = 10 years

and FV = 50 million

Bond price = 4.5* (1 - (1.0525)^(-10))/.0525 + 50/(1.0525)^10

Bond price = $64.30 Million

Javert will pay back $64.30 Million to buy back its current outstanding bonds.

Ans 2) with refinance Javert will save $64.3041 - $50 = $14.3041 Million

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