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    Bond refunding

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    Delta Corporation has $20 mil bond obligation outstanding, which is considering refunding.

    Through the bonds were initially issued at 13% the interest rates on similar issues have declined to 11.5%.

    The bonds were originally issued for 20 years and have 16 years remaining.
    The new issue would be for 16 years.

    There is a 9% call premium on the old issue.

    The underwriting cost on the new $20 mil issue is $560,000 and the underwriting cost of the old issue is $400,000.

    The company is in a 40% tax bracket, and it will use a 7% discount rate (rounded after tax cost of debt) to analyze the refunding decision.

    Should the old issue be refunded with new debt?

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    Solution Summary

    The solution explains how to evaluate a bond refunding decision.