The town of Hecla needed to improve its street curbs and sid

The town of Hecla needed to improve its street, curbs, and sidewalks and the town council issued callable bonds in the amount of $2,000,000 at 9% on January 1, 2012 to get the work done. The bonds were due in 2027. If the interest rates fell to 6.5% on January 1, 2017, then how much can Mayor Fligge and the town of Hecla save by recalling the bonds and reissuing them at the 6.5% rate on January 1, 2017?

Solution

Incremental Initial Flows

Inflows from New Bond   $2,000,000

Repayment of Old Bond $(2,000,000)

New Interest Payment $ (130,000)

Savings of Old Interest Payment $ 180,000

Net Cash Flow $ 50,000 per Year