The Buffett Restaurant Company currently has $100 million of 9%

coupon bonds outstanding. These bonds pay interest semiannually, mature in ten years, and are callable at 102.

Buffett also has $100 million of 8¹⁄₂% coupon bonds outstanding. These bonds pay interest semiannually, have ten years remaining to maturity, and are callable at 101.

Both issues of bonds are trading to yield 6%.

a. What is the market value of Buffett’s outstanding bonds?

b. If Buffett is considering retiring both issues, should it buy the bonds in the open market or call the bonds? Explain.

c. Suppose that Buffett can issue new bonds with a 6% coupon.

Ignoring flotation costs, what is the face value of these new bonds that must be issued to replace each of Buffett’s two outstanding issues?