Time Value of Money and Early Extinguishment of Debt Flanders, Inc., has a $700,

Question

Time Value of Money and Early Extinguishment of Debt

Flanders, Inc., has a $700,000, 8 percent bond issue that was issued a number of years ago at face value. There are now 10 years left on the bond issue, and the market interest rate is 16 percent. Interest is paid semiannually. The company purchases the bonds on the open market at the calculated current market value and retires the bonds. If required, round to the nearest dollar.

1. Using present value tables Table 1 and Table 2, calculate the current market value of the bond issue.
$  

2. Is there a gain or loss on retirement of bonds?

How much is it?

Explanation / Answer

n= 10*2= 20 years

i = 8%

Interest 700,000@4% = 28,000 * 9.81815                  = 274,908

Face valeu 700,000 *.21455                                      = 150,185

Present value                                                             = $425,093

Loss on retirment 700,000 - 425,093 = $274,907

n= 10*2= 20 years

i = 8%

Interest 700,000@4% = 28,000 * 9.81815                  = 274,908

Face valeu 700,000 *.21455                                      = 150,185

Present value                                                             = $425,093

Loss on retirment 700,000 - 425,093 = $274,907

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