Question

Ten years ago, DEWA, an electricity and water authority,
issued $20 million worth of municipal
bonds that carried a coupon rate of 6% per year,
payable semiannually. The bonds had a maturity
date of 25 years. Due to a worldwide recession,
interest rates dropped significantly enough for the
utility to consider paying off the bonds early at a
10% penalty to the face value. DEWA would then
reissue the bonds at the same face value (i.e., $20
million) for the remaining 15 years, but at a lower
coupon rate of 2% per year, payable semiannually.
What would be the semiannual rate of return to
DEWA, if it proceeds with this plan?

BY HAND PLEASE NO EXCEL.

Answer 1