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    Net present value of the refunding of callable bond Present

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    The State of Florida issued $2,000,000 of 12 percent coupon, 20-year semiannual payment, tax-exempt bonds 5 years ago. The bonds had 5 years of call protection, but now the state can call the bonds if it chooses to do so. The call premium would be 5 percent of the face amount. Today 15-year, 10 percent, semiannual payment bonds can be sold at par, but flotation costs on this issue would be 2 percent, or $40,000. What is the net present value of the refunding?

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    Solution Preview

    Investment Outlay: t = 0 Present value at
    10%

    1. Call premium on old issue (5% x 2,000,000) (100,000)
    2. Flotation costs on new issue (2% x 2,000,000) ...

    Solution Summary

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    $2.19

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