The older bonds have a face value of $100,000 each and pay 18% in semi-annual instalments. They have an early call provision for a 5% premium over face value. The bonds were sold 8 years ago and have a 12-year term. A payment (number 16) was made last week. These bonds were sold at a premium ($110,000 less $2,500 in selling expenses) in part because of the early call premium. The pre-tax MARR of DCI is 17.5%.
• Considering the remaining life and current values of the bonds are the basis of the calculation, not their initial values, how would you explain this in layman’s terms?