Bond Refunding

4.In Question 6 we execute a bond refunding. The terms and conditions of the outstanding bond are as follows:

Par Value = 100.00% of par,

Coupon = 6.65%,

Payments per Year = 1.00

Maturity at Issue = 10.00 Years,

First Call Date at Issue = End of Year 5.00 Years, and

Today's Date = End of Year 7 (hence, currently callable).

The tab in the template workbook titled "Q6 - Refunding" has all the information pertaining to the current yield curve environment along with a 0% vol and 18% vol interest rate tree holding forward rates and interest rate volatility, which is 18% for this exercise.

The issuer can offer new bonds (a/k/a refunding bonds) at an option-adjusted spread (OAS) of 80.0 basis points (bps) for a three-year bond. The cost of issuing a new bond is 0.35% of par, or 35 bps.

a.What is the coupon on the refunding bond?

b.What are the cash flow savings from the call?

c.What is the net present value (NPV) of the cash flow savings?

d.What is the efficiency of the call?