Problem: A city advertised for bids for the purchase of $2 million principal amount of Sewage Works Revenue Bonds. Bonds will be delivered on April 1, 2007; interest will be paid on April 1 of the following years. The bonds mature as follows:
Maturity
Date
Amount ($)
April 1, 2012 50,000
April 1, 2013 50,000
April 1, 2014 50,000
April 1, 2015 100,000
April 1, 2016 100,000
April 1, 2017 100,000
April 1, 2018 150,000
April 1, 2019 150,000
April 1, 2020 150,000
April 1, 2021 550,000
April 1, 2022 550,000
Two bids were received:
From Five Points Securities: Pay $2 million
The interest rates for each maturity:
2012 through 2020, 5.50 percent
2021 through 2022, 6.25 percent
From Wellington-Nelson: Pay $2 million
The interest rates for each maturity:
2012 through 2014, 4.19 percent
2015 through 2020, 5.75 percent
2021 through 2022, 6.50 percent
For each bid, compute the net interest cost (NIC) and the true interest cost (TIC). Which bid is most advantageous to the city?
(Please show all calculations.)