1. Consider the prices of the following three Treasury issues as of February 24, 2012
|
6.80
|
May 17
|
118.50000
|
118.56250
|
-15
|
5.34
|
|
8.670
|
May 17
|
115.68750
|
115.68750
|
-7
|
5.30
|
|
12.420
|
May 17
|
140.78125
|
140.96875
|
-17
|
5.38
|
The bond in the middle is callable in February 2013. What is the implied value of the call feature?
2. Charles River Associates is considering whether to call either of the two perpetual bond issues the company currently has outstanding. If the bond is called, it will be refunded, that is, a new bond issue will be made with a lower coupon rate. The proceeds from the new bond issue will be used to repurchase one of the existing bond issues. The information about the two currently outstanding bond issues is
|
Coupon rate
|
|
7
|
%
|
|
8
|
%
|
|
Value outstanding
|
$
|
126,000,000
|
|
$
|
133,000,000
|
|
|
Call premium
|
|
6.5
|
%
|
|
8.5
|
%
|
|
Transaction cost of refunding
|
$
|
11,600,000
|
|
$
|
13,500,000
|
|
|
Current YTM
|
|
6.25
|
%
|
|
7.1
|
%
|
The corporate tax rate is 35 percent.
What is the NPV of the refunding for each bond?
Bond A ?
Bond B ?