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Net Present Value of a City's Refunding

The City of Charleston issued $3,000,000 of 8% coupon, 30-year, semiannual payment, tax-exempt muni bonds 10 years ago. The bonds had 10 years of call protection, but now the bonds can be called if the city chooses to do so. The call premium would be 6% of the face amount. New 20-year, 6%, semiannual payment bonds can be sold at par, but flotation costs on this issue would be 2% of the amount of bonds sold. What is the net present value of the refunding? Note that cities pay no income taxes, hence taxes are not relevant.

A. $453,443
B. $476,115
C. $499,921
D. $524,917
E. $551,163

Solution Preview

In order to find the NPV of the bond refunding, we need to calculate the outflows and the inflows and then calculate the present value. The outflows are the call premium and the bond ...

Solution Summary

The solution explains how to calculate the net present value of refunding in displayed calculations.