If Alliant can issue a $110 million 20-year refunding bond at 7.45% and call an older $110 million issue with 20 years to maturity that had a coupon of 8.80%, what is the present value of the interest savings? Assume a 40% tax rate.
A) $11,620,259
B) $17,820,000
C) $ 9,117,935
D) $29,561,100

Question

Quizplus · Accepted Answer

The interest savings per year is ($110 million * 8.80%) - ($110 million * 7.45%) = $1,485,000. The after-tax savings is $1,485,000 * (1 - 0.40) = $891,000. The present value of these savings over 20 years at the new bond rate of 7.45% is $891,000 * (1 - (1 + 0.0745)^-20) / 0.0745 = $11,620,259.

If Alliant Can Issue a $110 Million 20-Year Refunding Bond