Market Risk

home / study / questions and answers / business / finance / charles river associates is considering whether …

Question

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:

Bond A Bond B
Coupon rate 7 % 8 %
Value outstanding $ 127,000,000 $ 134,000,000
Call premium 7.5 % 8.5 %
Transaction cost of refunding $ 11,700,000 $ 14,000,000
Current YTM 6.25 % 7.1 %