Ten years ago, DEWA, an electricity and water authority, issued $20 million worth of municipal bonds that carried a coupon rate of 6% per year, payable semiannually. The bonds had a maturity date of 25 years. Due to a worldwide recession, interest rates dropped significantly enough for the utility to consider paying off the bonds early at a 10% penalty to the face value. DEWA would then reissue the bonds at the same face value (i.e., $20 million) for the remaining 15 years, but at a lower coupon rate of 2% per year, payable semiannually. What would be the semiannual rate of return to DEWA, if it proceeds with this plan?

Ten years ago, DEWA, an electricity and water authority, issued $20 million worth of municipal bonds that carried a coupon rate of 6% per year, payable semiannually. The bonds had a maturity date of 25 years. Due to a worldwide recession, interest rates dropped significantly enough for the utility to consider paying off the bonds early at a 10% penalty to the face value. DEWA would then reissue the bonds at the same face value (i.e., $20 million) for the remaining 15 years, but at a lower coupon rate of 2% per year, payable semiannually. What would be the semiannual rate of return to DEWA, if it proceeds with this plan?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter20: Financing With Derivatives

Section20.B: Bond Refunding Analysis

Problem 2P

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