ABSTRACT

This chapter considers four possible solutions to the optimum bid choice decision facing a municipality with a pending bond issue. The four methods are: net interest cost (NIC), Canadian interest cost (CIC), present value, and none of the above. The NIC does not effectively consider the time value of money. This is a measure that cannot be used to give reliable preference rankings of different bids. The CIC method is actually the equivalent of using the yields to maturity to evaluate bids. Using the present-value method, one computes the net present values of all the debt alternatives and chooses the bid with highest positive net present value. The major problem with using the present-value method is the choice of the interest rates to be used. The calculation is made complex when the term structure of interest rates is not constant, and a different interest rate should be chosen for each time period.