Consequence of retiring the debt early

Assignment Help Financial Management

Reference no: EM13880618

Retiring Debt Early

Smith & Company issued $80 million maturity value of 5-year bonds, which carried a coupon rate of 6% and paid interest semi annually.

At the time of the offering, the yield rate for equivalent risk-rated securities was 8%.

Two years later, market yield rates had risen to 10%, 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 if Smith & Company does not need the financing?

Reference no: EM13880618

Questions Cloud

Compute the balance in your margin account at the end : You are short 27 gasoline futures contracts, established at an initial settle price of $2.505 per gallon, where each contract represents 42,000 gallons. Compute the balance in your margin account at the end of each of the four trading days, and compu..

Expected return standard deviation stock fund : A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term government and corporate bond fund, and the third is a T-bill money market fund that yields a rate of 5.0%. Expected Return Standard Deviat..

Local government decided to tax the interest income : Suppose your local government decided to tax the interest income on its own bonds as part of an effort to rectify serious budgetary woes. If, before the change in tax status, the yields on the bonds described were below the Treasury yield of the same..

Treasury yield of the same maturity : Suppose your local government decided to tax the interest income on its own bonds as part of an effort to rectify serious budgetary woes. If, before the change in tax status, the yields on the bonds described were below the Treasury yield of the same..

Consequence of retiring the debt early : Smith & Company issued $80 million maturity value of 5-year bonds, which carried a coupon rate of 6% and paid interest semi annually. Calculate the gain or loss that Smith & Company will incur as a consequence of retiring the debt early. Is the ea..

How many contracts do you buy or sell : Suppose you want to hedge a $390 million bond portfolio with duration of 8.7 years using 10-year Treasury note futures with duration of 6.6 years, a futures price of 108, and 98 days to expiration. The multiplier on Treasury note futures is $100,000...

Informational efficiency and efficient markets hypothesis : Which of the following is not part of the theory of informational efficiency and the efficient markets hypothesis? All information relevant to the values of traded securities can be obtained easily and at low cost. Buyers and sellers do not act ratio..

Benchmark for determining projects cost of capital : The corporate cost of capital provides a benchmark for determining a project's cost of capital. In general, projects that are riskier than average must have a cost of capital that is higher than the corporate cost of capital, while projects that are ..

What happens to the value of the diversified portfolio : Construct a spreadsheet to replicate the analysis of the table. Click here to view the table. That is, assume that $10,000 is invested in a single asset that returns 7 percent annually for twenty-five years and $2,000 is placed in five different inve..

User Account

All Pages