The City of Charleston issued $3,000,000 of 8% coupon, 30-year, semiannual payme
ID: 2635466 • Letter: T
Question
The City of Charleston issued $3,000,000 of 8% coupon, 30-year, semiannual payment, tax-exempt muni bonds 10 years ago. 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.
(a) $453,443
(b) $476,115
(c) $499,921
(d) $524,917
(e) $551,163
Please Show work
Explanation / Answer
Answer should be (A)
Cost of refunding:
Call Premium =0.06*3 million = 180000
Floatation cost = 0.02 *2 million = 40,000;
Total investment outlay = 2,40,000;
Interest on old bond = 0.04*3 million = 120000 ;
Interest on new bond = 0.03*3 million = 90,000;
Savings = 30,000
PV of savings, 40 periods at 3% = P.V.F for 40 periods @ 3% * 30000= = 23.11477*30000 = $ 693443
NPV of refunding = PV of savings - cost of refunding = $ 453443
$ 453,443
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