Appendix 20B
Bond Refunding Analysis
APPENDIX 20B
BOND REFUNDING ANALYSIS
SOLUTION TO PROBLEMS:
1. Step A – Calculation of interest savings:
Annual interest, old = ($150 million)(0.12)(1 – 0.40) = $10,800,000
Present value of interest savings = ($1,800,000)(PVIFA.06, 20)
Step B – Calculation of net investment:
P.V. issuance cost, old issue = [($600,000/20)(0.40)(11.470)]
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Appendix 20B
Bond Refunding Analysis
Summary of net investment
Call premium $4,500,000
Step C – Calculation of net present value of refunding:
P.V. interest savings $20,646,000
2. Step A – Calculation of interest savings.
Present value of interest savings = ($0.9 million)(PVIFA0.048, 20)
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Appendix 20B
Bond Refunding Analysis
Step B – Calculation of net investment.
* After-tax call premium
* Issuance cost of new issue:
*Summary of net investment
Call premium $2,400,000
Step C – Calculation of net present value of refunding:
P.V. interest savings $11,408,670
The result is positive. Therefore, the old issue should be called and
refunded with the new issue.
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Appendix 20B
Bond Refunding Analysis
3. Step A – Calculation of interest savings:
Annual interest, old = ($250 million)(0.115)(1 – 0.40) = $17,250,000
Present value of interest savings = ($2,250,000)(PVIFA.06, 15)
Step B – Calculation of net investment:
After tax call premium = (0.035)(1-0.40)($250 million) = $5,250,000
P.V. issuance cost, old issue = [($937,500/15)(0.40)(9.712)]
Overlapping interest = ($250 million)(0.115)(1 – 0.40)(3/52)
Summary of net investment:
Call premium $5,250,000
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Appendix 20B
Bond Refunding Analysis
Step C – Calculation of net present value of refunding:
Net present value of refunding $14,812,741 (tables)
$14,813,304 (calculator)
Since the NPV is positive, Phillipsburg should refund the old bond issue.
4. Step A – Calculation of interest savings:
Annual interest, old = ($200 million)(0.125)(1 – 0.40) = $15,000,000
Present value of interest savings = ($3,000,000)(PVIFA.06, 10)
Step B – Calculation of net investment:
P.V. issuance cost, old issue = [($666,667/10)(0.40)(7.360)]
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Appendix 20B
Bond Refunding Analysis
Summary of net investment
Call premium $4,800,000
Step C – Calculation of net present value of refunding:
P.V. interest savings $22,080,000
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