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Anytown, USA is considering options for issuing tax free municipal bonds. Assume that the two relevant bond ratings and associated interest rates as...
Anytown, USA is considering options for issuing tax free municipal bonds. Assume that the two relevant bond ratings and associated interest rates as shown below. Assume insurance can be purchased by Anytown on the bonds that will raise their ratings from CCC to BBB that costs 2% of the bond value annually, all of which must be paid up front. The insurance guarantees that the buyer will get their dividends and face value. Determine whether purchasing the insurance is worthwhile given the information below. Would the decision change if the bonds were 10 year bonds?Rating
