Question: Group 4. Another option for financing is to call in the outstanding bonds you have issued and obtain a loan with more favorable terms than

Group

4. Another option for financing is to call in the outstanding bonds you have issued and obtain a loan with more favorable terms than the bonds you would issue. Presently, the company has a 6% coupon bond that matures in 11 years. The bond pays interest semiannually.

What is the market price of a $1,000 face value bond if the current rate of interest is 12.9%?

How much will it cost the company to call in 1,000 of these bonds? Is it worth pursuing this strategy if your interest rate on a loan is 13%? Assume that the firm has to pay 10% more than the market price to buy back the bonds (that is "call in the bonds"). For example, if the $1,000 bond was priced $850 then a 10% premium would mean the firm would have to pay $935 to buy back the bonds. Do not assume that the price of the $1,000 is $850 which is just for illustration, you have to calculate the price.

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