Orlando advertised for bids for the purchase of $3 million principal amount of Waste Water Revenue...

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Finance

Orlando advertised for bids for the purchase of $3 millionprincipal amount of Waste Water Revenue Bonds. Bonds will bedelivered on April 1, 2021, and the interest will be paid on April1st of the following years. The bonds mature as follows:
Maturity Date
Amount ($)
4/1/2025
100,000
4/1/2026
100,000
4/1/2027
100,000
4/1/2028
100,000
4/1/2029
200,000
4/1/2030
200,000
4/1/2031
250,000
4/1/2032
250,000
4/1/2033
250,000
4/1/2034
700,000
4/1/2035
750,000
The City received three competing bids for the Waste Water RevenueBonds. The three offers are as follows:
From Rogue Securities:
• The City receives $3.5 million dollars
• The Interest Rates for the serial bonds with maturities:
o 2025 through 2030, 5.50 percent
o 2031 through 2035, 6.00 percent
From Johnson-Miller:
• The City Receives $3 million dollars
• The Interest Rates for the serial bonds with maturities:
o 2025 through 2027, 4.35 percent
o 2028 through 2032, 5.25 percent
o 2033 through 2035, 6.50 percent
From Shostak Corp:
• The City receives $2.9 million dollars
• The Interest rates for the serial bonds with maturities:
o 2025 to 2032, 5.75 percent
o 2033 to 2035, 6.25 percent
For each bid, compute the net interest cost (NIC) and the trueinterest cost (TIC). Which bid is more advantageous for thecity?

Answer & Explanation Solved by verified expert

4.5 Ratings (967 Votes)

Solution Note the interestcalculation here is pretty meticulous so for your understanding ihave attached an excel formula sheet of all the 3 offersNet Interest Cost NIC It is the notionalinterest cost that a bond issuer has to bear however it is notactual cost for issuer as this cost ignores time value of moneywhich See Answer

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Orlando advertised for bids for the purchase of $3 millionprincipal amount of Waste Water Revenue Bonds. Bonds will bedelivered on April 1, 2021, and the interest will be paid on April1st of the following years. The bonds mature as follows:Maturity DateAmount ($)4/1/2025100,0004/1/2026100,0004/1/2027100,0004/1/2028100,0004/1/2029200,0004/1/2030200,0004/1/2031250,0004/1/2032250,0004/1/2033250,0004/1/2034700,0004/1/2035750,000The City received three competing bids for the Waste Water RevenueBonds. The three offers are as follows:From Rogue Securities:• The City receives $3.5 million dollars• The Interest Rates for the serial bonds with maturities:o 2025 through 2030, 5.50 percento 2031 through 2035, 6.00 percentFrom Johnson-Miller:• The City Receives $3 million dollars• The Interest Rates for the serial bonds with maturities:o 2025 through 2027, 4.35 percento 2028 through 2032, 5.25 percento 2033 through 2035, 6.50 percentFrom Shostak Corp:• The City receives $2.9 million dollars• The Interest rates for the serial bonds with maturities:o 2025 to 2032, 5.75 percento 2033 to 2035, 6.25 percentFor each bid, compute the net interest cost (NIC) and the trueinterest cost (TIC). Which bid is more advantageous for thecity?