Harpo company has outstanding $100 million of 5% bonds, due in 7 years, and call

Question

Harpo company has outstanding $100 million of 5% bonds, due in 7 years, and callable at 102. The bonds were issued at par and are selling today at a market price of 92.

1. If Harpo company retires $10 million of these bonds by purchasing them from bondholders at current market price, the company will report:

a. an $800,000 gain

b. A $200, 000 loss

c. an unrealized gain

d. none of the above (neither gains or losses are recognized on early retirements of debt).

If Harpo Co. calls $10 million of these bonds it will report:

a. An $800,000 gain

b. A $200.000 loss

c. An unrealized gain

d. None of the above

Explanation / Answer

a. An $800,000 gain

b. A $200, 000 loss

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