RG Unlimited has a $500 million bond obligation outstanding. The bond has 10 years remaining and pays 6.5% interest.
As RG's credit rating has improved over the last few years if they were to issue a similar bond today it would only pay 5% interest.
The old bonds have a call premium of 7%. Any new bond issue would have underwriting costs of $3, 500,000.
RG has a marginal tax rate of 30% and expects a one month overlap period if they were to reissue the bonds.
Any extra cash can be invested on a short term basis earning 3%. Should RG refund their existing $500,000,000 bond with new debt?