A firm has a perpetual callable bond outstanding with a par value of $100 and an annual coupon of $14. The firm can refund this with a new noncallable perpetual bond having an 8 percent coupon. The call price on the old bond is $114. Flotation costs for a new issue are 2 percent of par. What is the myopic benefit of refunding?
A firm has a perpetual callable bond outstanding with a par value of $100 and an annual coupon of $14. The firm can refund this with a new noncallable perpetual bond having an 8 percent coupon. The call price on the old bond is $114. Flotation costs for a new issue are 2 percent of par. What is the myopic benefit of refunding?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:A firm has a perpetual callable bond
outstanding with a par value of $100 and an
annual coupon of $14. The firm can refund
this with a new noncallable perpetual bond
having an 8 percent coupon. The call price on
the old bond is $114. Flotation costs for a new
issue are 2 percent of par. What is the myopic
benefit of refunding?
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