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1. Consider the prices of the following three Treasury issues as of February 24, 2012
6.80
May 17
118.50000
118.56250
-15
5.34
8.670
115.68750
-7
5.30
12.420
140.78125
140.96875
-17
5.38
The bond in the middle is callable in February 2013. What is the implied value of the call feature?
2. Charles River Associates is considering whether to call either of the two perpetual bond issues the company currently has outstanding. If the bond is called, it will be refunded, that is, a new bond issue will be made with a lower coupon rate. The proceeds from the new bond issue will be used to repurchase one of the existing bond issues. The information about the two currently outstanding bond issues is
Coupon rate
7
%
8
Value outstanding
$
126,000,000
133,000,000
Call premium
6.5
8.5
Transaction cost of refunding
11,600,000
13,500,000
Current YTM
6.25
7.1
The corporate tax rate is 35 percent.
What is the NPV of the refunding for each bond?
Bond A ?
Bond B ?
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