Jasper will call and retire all outstanding 6% subordinated debentures (callable

Question

Jasper will call and retire all outstanding 6% subordinated debentures (callable at 104). Given the present interest rate of 5% on similar debt, it is expected that the debentures will require the full call premium. A rise in market interest rates to 6% would reduce the loss on bond retirement from the projected $75,000 to $65,000.

1.    Determine what amount is adequate for bond repurchase:

2.    Determine the authorization responsibility for the retirement:

3.    Determine the most probable cost of repurchasing the bonds:

Explanation / Answer

Answer to the above case:

1. For bond issuer, bonds can be brought at or before maturity. Redemption is made on face value unless it occurs before maturity, in which bond can be repurchased at a premium so that loss interest can be compensated. so in this case, bond can be repurchased at rate of 104

2. The company issuing the debenture will be responsible only after the consent of the debenture trustees. In this case, Jasper will be authorized.

3. As there is changing in the market interest rates, the purchase price. ie, the cost of repurchase will be equal to the carrying value of the bonds in the balance sheet.

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