Starting a two-week retreat in the canadian wilderness

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Reference no: EM13743416

The financial department of Delphi Consolidated Industries (DCI) is just starting a two-week retreat in the Canadian wilderness. The president of DCI has been approached by an investment banker who has acquired $1,000,000 in DCI bonds in one of his deals. He is offering to sell the bonds back to DCI for $900,000. The president thinks this seems like a good deal for DCI, but his background is in marketing, and he knows his limitations. DCI has had dealings with this investment banker before—his firm often underwrites DCI’s bond issues. The president remembers that you seem to know your way around capital investments and has asked you to recommend a course of action by September 13th (later this week). The offer to sell at this price is good through this date.The bonds consist of 100 bonds, each of which is identical. Each bond was issued 4.5 years ago and has a term of 10 years. The face value of each bond is $10,000, and it pays 14% in quarterly installments. The next payment will be made to the owner of record on September 20th (this is the 18th payment). When the 100 bonds were sold 4.5 years ago, they brought in $920,000 ($950,000 less $30,000 in selling expenses). The president and the board of directors have been talking about ways to use the unexpected profits from the sale of some land to the state for a right of way. One idea that was under consideration at the last meeting was to “call” (or pay off early) up to $1,500,000 of an older DCI bond issue.

•Considering the remaining life and current values of the bonds are the basis of the calculation, not their initial values, how would you explain this in layman’s terms?

Reference no: EM13743416

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