1. The University of Florida wants to build a new, state of the art tennis center. They decide that the best course of action is to issue a bond for the $115 million construction cost. Because Florida is a large public institution with a large endowment, they are able to offer a relatively low coupon rate of 2%. If the bond is a 15 year bond, what would UF’s yearly payment be? How much in total will they pay over the 15 years?
2. Repeat Problem #4, but this time the university has the option to pay back the par value early (a callable bond). At the end of Year 8, they already received enough additional revenues from new tennis spectators that they are able to pay back the bond. How much in total would they pay, and how much did they save by paying back the bond early?
3. Now assume that the University can invest their additional revenues and earn a total return of 17% between Year 8 and Year 15, when they would be required to pay back the par value. Assume there is no inflation or uncertainty with the investment, and it is very liquid. Would you advise them to pay back the bond now, or wait until Year 15? Why or why not?