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City of Gainesville issued muni bonds: What is the net present value of the refunding?

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The City of Gainesville issued $1,000,000 of 14 percent coupon, 30-year, semiannual payment, tax-exempt muni bonds 10 years ago. The bonds had 10 years of call protection, but now Gainesville can call the bonds if it chooses to do so. The call premium would be 10 percent of the face amount. New 20-year, 12 percent, semiannual payment bonds can be sold at par, but flotation costs on this issue would be 2 percent, or $20,000. What is the net present value of the refunding?

a. $ 30,463
b. $ 29,389
c. $150,000
d. $400,000
e. $ 50,317

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Answer is a. $ 30,463

Remaining life of the old bond= 20 years
Tenor of the new bond= 20 years
Discount rate= 12% (since 12% annual coupon bonds are selling for par)

Amount of ...

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