Suppose a city must replace aging water pipes in the city system that is expected to cost $50 million dollars. The new water pipes are expected to last for about 30 years. The city has an annual budget of about 225 million and is trying to decide whether to finance the pipe replacement out of the current revenues; or by borrowing the money by selling 30 year bonds with an interest rate of 5%; or by selling 15 year bonds with an interest rate of 2.5%. Outline the advantages and disadvantages of each financing method. Which would you recommend? Might there be any reason to combine methods?
Suppose a city must replace aging water pipes in the city system that is expected to cost $50 million dollars. The new water pipes are expected to last for about 30 years. The city has an annual budget of about 225 million and is trying to decide whether to finance the pipe replacement out of the current revenues; or by borrowing the money by selling 30 year bonds with an interest rate of 5%; or by selling 15 year bonds with an interest rate of 2.5%. Outline the advantages and disadvantages of each financing method. Which would you recommend? Might there be any reason to combine methods?
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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Suppose a city must replace aging water pipes in the city system that is expected to cost $50 million dollars. The new water pipes are expected to last for about 30 years. The city has an annual budget of about 225 million and is trying to decide whether to finance the pipe replacement out of the current revenues; or by borrowing the money by selling 30 year bonds with an interest rate of 5%; or by selling 15 year bonds with an interest rate of 2.5%. Outline the advantages and disadvantages of each financing method. Which would you recommend? Might there be any reason to combine methods?
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