In January 1, 2000, Argo issued a 10-year, $200M bond paying 6.5% annually in two equal coupons each June and December. It is now June 2004 and Argo just paid the June coupon on its existing bond. Rates have come down, so it is thinking of buying back the bond and issuing a 5-year, $230M bond. This bond matures in June 2009 and will pay 2.33% per year in equal coupons each June and December.

a.What is the price that Argo must pay the current bondholders to buy back the bond? (Hint - the present value of the coupon payments and the final face value)

b.What are the cash flows associated with the new bond?

c.What are the cash flow differentials to Argo? In other words, what are the net cash flows in or out for Argo each June and December when comparing both bonds?

d.What is the present value of these cash flow differentials?

e.What does the answer to Question 1, Part d tell you?

IMPORTANT: SHOW FORMULAS USED TO CALCULATE INSIDE BELOW TABLE

D F G H J N o Q R S U V X E 2000 June 2001 June 2002 June K 2003 June 2004 June 2005 June 2006 June S 2007 June 2008 June 2009 June Start Dec. Dec. Dec. Dec. Dec. Dec. Dec. Dec. Dec. Dec. A B 1 in M$ 2 Amt. Coupon 3 Existing Bonds 4. New Bonds 5 Purch. Price of Exist.Bonds 6 Incremental Cash Flows 7 NPV of Incremental CF in June 2004