East inc has 450000 face value callable bond outstanding, Ask an Expert

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East Inc. has $450,000 (face value) callable bond outstanding. This bond pay 15% annual coupons, has maturity of 26 years and is callable at par value plus three annual coupons. Currently, East’s borrowing cost drops to 8%, so it is considering calling the bond and replacing it with a new issue that also pays 8% annual coupons. The flotation cost for the new issue is $13,500. East has to issue the new bond 30 days before calling the old bond and will temporary invest the proceeds in 30-day Treasury Bill that yields 3%. The tax rate is 30%. a. What is the NPV of calling the old bond? b. Suppose the call premium is X% of the total nominal (undiscounted) interest saved instead, what value of X that makes the NPV of calling the old bond zero?

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Financial Management, Finance

Category:- Financial Management
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