You are considering refunding a currently outstanding bond with a par value of $10,000,000. It has a coupon of 11% and has ten years remaining to maturity. Current yields on ten year bonds are 9%. If you call the bond, there will be a 4% call premium. Underwriting costs on a new ten year issue will be $800,000. Your tax rate is 40%. Should you proceed with the refunding? (For ease of computation assume annual coupons)

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The Answer of You are considering refunding a currently outstanding bond with a par value of $10,000,000. It has a coupon of 11% and has ten years remaining to maturity. Current yields on ten year bonds are 9%. If you call the bond, there will be a 4% call premium. Underwriting costs on a new ten year issue will be $800,000. Your tax rate is 40%. Should you proceed with the refunding? (For ease of computation assume annual coupons)

You Are Considering Refunding a Currently Outstanding Bond with a Par