The State of Idaho issued $2,000,000 of 7% 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% of the face amount. Today 15-year, 5%, semiannual payment bonds can be sold at par, but flotation costs on this issue would be 2%. What is the net present value of the refunding? Because these are tax-exempt bonds, taxes are not relevant.

Question

Quizplus · Accepted Answer

The correct answer is A because the net present value of the refunding is $278,606. The present value of the old bonds is $1,721,394, and the present value of the new bonds is $1,442,788. The difference between these two values is the net present value of the refunding.

The State of Idaho Issued $2,000,000 of 7% Coupon, 20-Year