Module 20: Long-Term Financing 1. Why do public organizations use municipal bonds to finance long-term capital...

Module 20: Long-Term Financing 1. Why do public organizations use municipal bonds to finance long-term capital projects?

2. A major urban center is planning to issue a $100 million, 20-year, semiannual-interest-paying municipal bond for the construction of a stadium.

a. The interest rate is 5.875%, based on the economic and financial conditions of the city and city government.

b. The design and issuance costs are estimated to be $10 million and 1%, respectively.

c. What is the total interest paid if the city decides to adopt a level debt service structure?

d. How much will the city still owe on this bond at the end of each year?

Expert Solution

1.Municipal bonds are the debt securities issued by the states,cities,countries & other govertmental entities to fund day to day obligation and to finance capital projects such as building, school & sewer system.

Generally interest on municipal bonds is exempt from tax.

Also interest on municipal bond is usually lower than on taxable fixed income securities such as corporate bonds.

2.Semi annually payment would be =$100m/(1+.029375)^40 = $100m/23.35 = $4.28265m

Yearly closing would be:

Year	Opening	Installment	Int.	Pricipal	Closing
1	98.65485	4.28265	2.897986	1.384664	97.27019
2	95.84485	4.28265	2.815442	1.467208	94.37764
3	92.86733	4.28265	2.727978	1.554672	91.31266
4	89.71232	4.28265	2.635299	1.647351	88.06497
5	86.36923	4.28265	2.537096	1.745554	84.62367
6	82.82685	4.28265	2.433039	1.849611	80.97723
7	79.07329	4.28265	2.322778	1.959872	77.11342
8	75.09597	4.28265	2.205944	2.076706	73.01927
9	70.88156	4.28265	2.082146	2.200504	68.68106
10	66.41591	4.28265	1.950967	2.331683	64.08423
11	61.68405	4.28265	1.811969	2.470681	59.21337
12	56.67012	4.28265	1.664685	2.617965	54.05215
13	51.35728	4.28265	1.50862	2.77403	48.58325
14	45.72774	4.28265	1.343252	2.939398	42.78834
15	39.76259	4.28265	1.168026	3.114624	36.64797
16	33.44186	4.28265	0.982354	3.300296	30.14156
17	26.74432	4.28265	0.785614	3.497036	23.24728
18	19.64752	4.28265	0.577146	3.705504	15.94202
19	12.12766	4.28265	0.35625	3.9264	8.201264
20	4.159526	4.28265	0.122186	4.160464	-0.00094

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