Poway's Time Value of Money

Recently, the Poway Unified School District in California issued a very interesting bond. The bond issue was for $105 million. No payments will be made for 20 years, then the first payment of $30 million will be made. The next year, $47 will be due, then $50 million a year for the next 18 years. Check for yourself that the interest rate on this debt is 7.84 percent. While we think this is a relatively high interest rate in the current environment (although California municipal bonds are likely a very risky investment), assume that the interest rate is correct for this investment. If Poway had taken out an amortized loan with equal payment, the payments would have been for about $8.659 million per year, or a total of $346.4 million over 40 years. A normal bond issue with interest payments and a repayment of principal at the end of the loan would have annual interest payments of $8.237 million, for a total repayment of $442.7 million. Under the current bond terms, the total repayment will be $977 million. The multi-million dollar question: From a pure time value of money perspective, which of these bond terms is preferable? Answer: They are all the same! Why?