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.

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 new bonds is $3,000,000, and the present value of the call premium is $180,000. The flotation costs on the new bonds are $60,000. The net present value of the refunding is $453,443.

The City of Charleston Issued $3,000,000 of 8% Coupon, 30-Year