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City of St. Anthony, Minnesota May 17, 1988 City with the bond proceeds in order to finance the costs associated with the project, yet does not require any debt service payment by the City until maturity. It is anticipated that at maturity, the settlement with the Army will have taken place and the City will have funds on hand to repay the principal and accrued interest. If the final settlement is not sufficient to repay the bond issue in total at maturity, the City would have to pay the balance out of available water revenues or refinance the issue with a longer term General Obligation-Revenue Water Bond, payable out of future water earnings. Appendix I shows our projection of the Capital Appreciation Bond and how it accumulates interest., We anticipate the bond issue will settle in late July and will have a final maturity on July I, 1993. As is shown, there is no debt service to be paid by the City until 1993. Column 3 represents the original principal or the estimated amount of money available to the City. This number will be fine tuned to get as close to $875,000 as is practical, a result created by the actual interest rate received by the bonds. We have estimated an interest rate of 6.55% on the bonds, which when used as a discounting factor by the investor, results in a final payment of principal and interest to the investors of $1,200,000. This maturity value is shown in Column 6. If the interest rate comes in lower than the 6.55%, the maturity value will be adjusted downward until the point where the original principal amount reaches approximately $875,000. As an example, if the actual interest rate received is 6%, the final maturity value will be approximately $1, 175,000. Conversely, if the interest rate exceeds the 6.55% then the maturity value will be adjusted upward to assure • receipt of the approximate $875,000 needed. The difference between the final maturity value and the amount of bond proceeds received by the City represents the interest cost. Therefore, the lower the interest rate the lower the final maturity value. Our estimates at this time reflect an interest rate which is higher than we think will actually be received on the bonds, based upon interest rates in effect as of May 16. We have deliberately assigned a higher interest rate because market conditions seem to indicate an increase in interest rates over the next few months. The actual interest rates and the final maturity value will be determined by the bond sale. We are recommending that the bonds mature on July I, 1993, but be subject to prepayment. by the City as early as July I, 1992, in order to provide the City with some flexibility to repay the bonds if settlement with the Army occurs more rapidly than anticipated. Unfortuntely, purchasers of CAB's do not like to have their bonds callable and the call feature does produce a negative condition for some investors. The amount of that resistance to the call is not well documented, but we do not anticipate the negative impact will exceed the positive benefit of being able to repay the bonds early if recommendations warrant an earlier payment. If the bonds are prepaid the final maturity value will be adjusted to reflect the shorter time period. We are recommending the bonds be offered for sale at the City's regular meeting to be held on Tuesday, June 28. Proceeds of the issue will be available to the City on or about July 25. A bond rating for this issue will again be required. We do not anticipate any change in the City's current excellent "A" rating. The costs of the rating are included in our estimated costs of issuance for the bonds. These bonds will • Page 2