The City of Oxford issued $5 million of 8% coupon, 30-year, semiannual payment,
ID: 2765034 • Letter: T
Question
The City of Oxford issued $5 million of 8% coupon, 30-year, semiannual payment, tax-exempt municipal bonds 10 years ago. At time of issue, the bonds had 10 years of call protection. Now however, the bonds can be called if the city chooses to do so. The call premium is 6% of the face value. New 20-year, 5%, semiannual payment bonds ($5 million) can be sold at par, but flotation costs on this new issue would be 1.5%. Calculate the initial cost of refunding. Tax rate = 0%.
a. $30,000
b. $240,000
c. $375,000
d. $693,000
e. None of the above
Explanation / Answer
Answer to the Question
Intitial cost of refunding= Issue cost of Fresh Issue of Bond+Call Charges of Old Bond
=50,00,000*6%+50,00,000*1.5%
=3,00,000+75,000
=$375,000.
Thus (c) is the answer .initial cost of refunding $375,000.