Another option for financing is to call in the outstanding bonds you have issued

Question

Another option for financing is to call in the outstanding bonds you have issued and obtain a loan with more favorable terms than the bonds you would issue. Presently, the company has a 6% coupon bond that matures in 11 years. The bond pays interest semiannually. What is the market price of a $1,000 face value bond if the current rate of interest is 12.9%? How much will it cost the company to call in 1,000 of these bonds? Is it worth pursuing this strategy if your interest rate on a loan is 13%?

Explanation / Answer

Bond price formula = C + [1 - (1+r)-t ] / r + F / (1+r)t

C = 1000 * 6% / 2 = $30, r = 12.9% / 2 = 6.45%, n = 11*2 = 22 periods, F = 1000

Putting the values in the formula, we get-

30 + [1- (1+.0645) -22 ] / .0645 + [1000 / (1+.0645)22 ]

Bond price = 370.085 + 252.825

Bond price = $622.91

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