Bond refunding
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Margret Kimberly, CFO of Charles river Associates, is considering whether or not to refinance the two currently outstanding corporate bonds of the firm. The first one is a 8% perpetual bond with a $1000 face value with $75 million outstanding. The second one is a 9% perpetual bond with the same face value with $87.5 million outstanding. The call premiums for the two bonds are 8.5% and 9.5% the face value, respectively. The transaction cost of the refunding are $10 million and $12 million respectively. The current interest rates for the two bonds are 7% and 7.25% respectively. Which bond should Ms. Kimberly recommend be financed? What is the NPV of the refunding?
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Solution Summary
The solution explains how to evaluate a bond refunding decision.
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Bond 1
Coupon rate 8%
Current rate 7%
Face value $1,000
Outstanding $75,000,000
Call premium 8.50%
Refunding costs $10,000,000
Bond 2
Coupon rate 9%
Current rate 7.25%
Face value $1,000
Outstanding $87,500,000 ...
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