The State of Idaho issued $2,000,000 of 7% coupon, 20-year semiannual payment, t

Question

The State of Idaho issued $2,000,000 of 7% coupon, 20-year semiannual payment, tax-exempt bonds 5 years ago. The bonds had 5 years of call protection, but now the state can call the bonds if it chooses to do so. The call premium would be 5% of the face amount. Today 15-year, 5%, semiannual payment bonds can be sold at par, but flotation costs on this issue would be 2%. What is the net present value of the refunding? Because these are tax-exempt bonds, taxes are not relevant.

a. $278,606
b. $292,536
c. $307,163
d. $322,521
e. $338,647

Explanation / Answer

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