An English-language PDF of this Brief Case in an academic course pack will allow the students with the opportunity to buy an audio form as well.In 2009, a current MBA graduate needed to assess the potential refunding options for bonds that had been issued in 2000 when the going interest rate was higher. She must also take into account the possible results of buying the company bonds that had been outstanding again via the utilization of cash that may be gathered with the issuing of new bonds at a lesser than before interest rate. Students need to conduct a quantitative task.
Value of Bonds
At bond issue (1999), At January 2009,
Face Value ($), Coupon Rate, Coupon Payment (semi-annual), Interest Rate (YTM), Maturity (years), Value of Bond
Balance Sheet Loan Balance Calculation
Beginning Loan Balance, Interest Due, Interest Paid, Amortized Interest, Ending Loan BalanceDifference between 6% and 8% bonds
1. Explain what is meant by the terms ‘premium’ and ‘discount’ as they relate to bonds. Compute exactly how much the company received from its 8% bonds if the rate prevailing at the time of issue was 9%. Also, re-compute the amounts shown in the balance sheet at December 31, 2006 and December 31, 2007, for Long-Term Debt. What is the current market value of the bonds outstanding at the current effective interest rate of 6%?
2. If you were Rene Cook, would you recommend issuing $10 million, 6% bonds on January 2, 2009 and using the proceeds and other cash to refund the existing $10 million, 8% bonds? Will it cost more, in terms of principal and interest payments, to keep the existing bonds or to issue the new ones at a lower rate? Be prepared to discuss the impact of a bond refunding on the following areas:
o Cash flows
o Current year’s earnings
o Future years’ earnings
Note: For purposes of your computations, assume that refunding, if selected, occurs effective January 2, 2009, at a price of $1154.15 per bond. Ignore the effects of income tax. How many new $1000 bonds will Lyons have to issue to refund the old 9% bonds?
3. Assume 6% bonds could be issued and the proceeds used to refund the existing bonds. Compare the effects of these transactions with those calculated in Question 2. If you were Rene Cook, what amount of new bonds would you recommend and why?
Question No 2 and 3 are almsot same