Question 2:

(4 points) Suppose Pima County issued a $100 million debt to build a new jail in 2009. The interest rate on the debt was 6%. The original debt payment schedule was to pay off the debt in 30 years with equal annual payment every year. After ten years, the interest rate is now down to 4% in 2019. The County wants to refinance its debt at this low rate, that is to say to issue a new debt at 4% to pay off what is left of the old debt and then make debt payment on the new debt. If the city can issue a new debt at 4% with a maturity of 20 years beginning in 2019, please figure out:

1. What is the annual level payment on the old debt? (1 point)
2. What is the amount of the new debt? (1 point)
3. What is the saving in annual payment every year for the next 20 years? (Assume also an equal annual payment on the new bond.) (1 point)
4. Use this case as an example, briefly comment on why citizens should care about your local government debt management. (1 point)