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Copying is strictly prohibited. I will rate. You have decided to advance refund $10,000,000 of outstanding...

Copying is strictly prohibited. I will rate.

You have decided to advance refund $10,000,000 of outstanding debt that is callable in five years. The interest rate on these bonds is 8 percent. You can issue new bonds at 6 percent. For every dollar of new debt issued, you will incur a 5 percent issuance cost. Interest payments on the present issue are $800,000 per year with no scheduled principal payments. How much new debt needs to be issued to realize the defeasance of the present issue?

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Answer #1

Amount needs to be refunded is $ 10,000,000

Interest on present issue = 8%

Interese on New Bonds issue = 6%

Issuance Cost = 5%

Realizable value from new issue = (1-5%)* value of bonds

Realizable value of bonds should equate with $ 10,000,000 payable now

.95 * value of bonds = $ 10,000,000

Value of bonds = $10,000,000/.95

Value of bonds to be issued = $10,526,316

Therefore value of bonds to be issued to refund the amount of bonds $ 10,000,000 is $ 10,526,316

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