PROBLEM 1.

In January 1, 2016, Argo issued a 10-year, $700M bond paying 5.55% annually in two equal coupons each June and December. It is now June 2020 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, $300M bond. This bond matures in June 2025 and will pay 3.45% per year in equal coupons each June and December.

a. What is the price that Argo must pay the current bond holders to buy back the bond?

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? PLEASE SHOW FORMULAS IN EXCEL AND USE THE PROVIDED TEMPLATE.

2016 June Dec. 2017 June Dec. 2018 June Dec. 2019 June Dec. 2020 June Dec. 2021 June Dec. 2022 June Dec. 2023 June Dec. 2024 June Dec. 2025 June Dec. Start in M$ Amt. Coupon Existing 700.0 5.55% New Bo 300.0 3.45% Purchase Price of Existing Bonds Incremental Cash Flows PV of Incremental CF in June 202 Text answers here