The City of Charleston issued $3,000,000 of 8% coupon, 30 year, semiannual payment, tax-exempt muni bonds 10 years ago. The bonds had 10 years of call protection, but now the bonds can be called if the city chooses to do so. The call premium would be 7.50% of the face amount. New 20 year, 6%, semiannual payment, bonds can be sold at par, but flotation costs on this issue would be 3.0% of the amount of bonds sold. What is the net present value of the refunding?

For example, if we assume a 7% discount rate for this particular calculation, then we would need to calculate the present values of both bond issues separately before determining any net savings. In order to do this we would multiply each bond’s face value by its respective yield factor (i.e., 0.812 for 8% coupon bonds and 0.961 for 6% coupon bonds) which yields an estimated present value of $2,415,200 and $2,880,000 respectively.

Once these figures have been calculated we can then take into account other factors such as flotation costs (3%) and call premiums (7.5%). After applying these adjustments our final result shows that there is a net savings potential of around $118,700 which represents the net present value of the refunding option in question after taking all associated costs into account.