RefundBond Corp. has a $10 million bond obligation outstanding which it is considering refunding. The bonds were issued at 12% and the interest rates on similar bonds have declined to 10%. The bonds have 12 years of their 20 year maturity remaining. RefundBond will pay a call premium of 6% and will incur underwriting costs of $400,000 immediately. The underwriting cost can be amortized over 5 years. The company is in a 40% tax bracket. There is no overlap interest period. The discount rate is 6%
Should the old issue be refunded?

Question

RefundBond Corp. has a $10 million bond obligation outstanding which it is considering refunding. The bonds were issued at 12% and the interest rates on similar bonds have declined to 10%. The bonds have 12 years of their 20 year maturity remaining. RefundBond will pay a call premium of 6% and will incur underwriting costs of $400,000 immediately. The underwriting cost can be amortized over 5 years. The company is in a 40% tax bracket. There is no overlap interest period. The discount rate is 6%
Should the old issue be refunded?