years ago, the City of Melrose issued $3,000,000 of 8% coupon, 30-year, semiannual payment, tax-exempt muni bonds 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.

Question

Quizplus · Accepted Answer

The correct answer is A because the net present value of the refunding is $453,443. The present value of the old bonds is $2,746,557 and the present value of the new bonds is $2,293,114. The difference between these two values is the net present value of the refunding.

Years Ago, the City of Melrose Issued $3,000,000 of 8