BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

Solutions

Chapter
Section
BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Communication

Nordbock Inc. reports the following outstanding bond issue on its December 31, 20Y1, balance sheet:

$1,000,000, 7%, 10-year bonds that pay interest semiannually.

The bonds have been outstanding for five years and were originally issued at face amount. The company is considering redeeming these bonds on January 1, 20Y2, at 103 and issuing new $1,000,000, 5%, live-year bonds at their face amount. These bonds would pay interest semiannually on June 30 and December 31.

Write a brief memo to Liz Nolan, the chief financial officer, discussing the costs of redeeming the existing bonds, the proceeds from issuing the new bonds, and whether this is a good financial decision.

To determine

Bond investment: Bond investments are debt securities which pay a fixed interest revenue to the investor.

To draft: A memo to LN, chief financial officer of Incorporation N, explaining the financial issues related with redeeming of the bonds and issue of new bonds, and whether the redemption and issue is correct financial decision or not

Explanation

Prepare a memo to the LN, chief financial officer (CFO) of Incorporation N, explaining the financial issues related with redeeming of the bonds and issue of new bonds.

MEMO

Date:    February 25, 2018

To:    LN, CFO, Incorporation N

From:    Ms J

Subject:  Redemption old bonds and issue of new bonds

To conclude whether the financial decision is good or not, first the redemption of 7% old bonds should be compared to the new issue of 5% bonds. The following things should be considered:

  • Proceeds from new issue
  • Cost of redeeming old bonds
  • Cost of interest expense of old bonds and new bonds (any interest savings)

The following table shows the interest expense of both the bonds and the interest savings:

Details 7% Bonds (Old) 5% Bonds (New)
Face value of the bonds $1,000,000 $1,000,000
Rate of interest × 7% × 5%
Payment terms (semiannual) × 0.5 × 0.5
Semiannual interest expense $35,000 $25,000

Table (1)

So, the new issue would save $10,000 ($35,000$25,000) on one semiannual interest period. Since the old bonds have 5 years to maturity, the interest savings for 5 years on 2 semiannual periods would be $100,000 ($10,000×2×5)

Still sussing out bartleby?

Check out a sample textbook solution.

See a sample solution

The Solution to Your Study Problems

Bartleby provides explanations to thousands of textbook problems written by our experts, many with advanced degrees!

Get Started

Additional Business Solutions

Find more solutions based on key concepts

Show solutions add

Why do executives and managers spend more time listening than do workers?

Essentials of Business Communication (MindTap Course List)

What is a slide error?

College Accounting, Chapters 1-27

Which depreciation method is similar to the method used to compute depletion expense?

College Accounting, Chapters 1-27 (New in Accounting from Heintz and Parry)

EXCHANGE RATES Use the foreign exchange section of a current issue of The Watt Street Journal to look up the si...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)

Explain why economists usually oppose controls on prices.

Principles of Macroeconomics (MindTap Course List)