Description of Bond refunding
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The State of Florida issued $1,000,000 of 12 percent coupon. 10-year annual payment, tax-exempt bonds 5 years ago. The bond had 5 years of call protection, but now the state can call the bond if its chooses to do so. The call premium would be 2 percent of the face amount. The 5-year, 10 percent, annual payment bond can be sold at par, but flotation costs on this issue would be 4 percent, or $40,000. What is the net present value of the refunding?
A. $100,000
B. $15,816
C. $40,000
D. $26,449
E. -$44,449
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Solution Summary
The solution explains the evaluation of a bond refunding decision.
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There are inflows and outflows with bond refunding. The outflows are the call premium and the bond issue and the inflows are the savings in interest.
Outflows
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