Retiring Debt Early. Smith & Company issued $100 million maturity value of six-y

Question

Retiring Debt Early.

Smith & Company issued $100 million maturity value of six-year bonds, which carried a coupon rate of six percent and paid interest semiannually. At the time of the offering, the yield rate for equivalent risk-rated securities was eight percent. Two years later, market yield rates had risen to ten percent, and since the company no longer needed the debt financing, executives at Smith & Company decided to retire the debt.

Calculate the gain or loss that Smith & Company will incur as a consequence of retiring the debt early. Is

the early retirement of the debt a good decision? What factors should be considered in making this decision?

Explanation / Answer

Carrying Amount of Bonds: ±Cash Required to Retire Bond ±Gain on Retirement: $75,806,291 ?$71,878,893 = $3,927,398. Is the early retirement of the debt a good decision if Smith & Company does not need the Fnancing? Yes. Retirement was also favourable at this point because the yields are higher.

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