United Brits Ltd. has a bond outstanding that carries a 10 percent coupon rate paid annually. Current

Question:

United Brits Ltd. has a bond outstanding that carries a 10 percent coupon rate paid annually. Current bond yields are 7.5 percent. It has $30 million outstanding and 12 years left to maturity. A new issue would require $500,000 for flotation costs, and the existing issue has written off all its flotation expenses. An overlap period of 30 days would be anticipated, during which money market rates would be 2.5 percent. United Brits Ltd. has a tax rate of 30 percent. The call premium on the outstanding issue is currently at 10 percent.
a. Calculate if refunding would be justified.
b. Compute the price of a bond in the market, if there was no call provision. How does this compare to the call price?

Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a...

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