Townson Co. has outstanding $100 million of 7% bonds, due in 7 years, and callable at 104. The bonds were issued at par and are selling today at a market price of 94. If Townson Co. calls $20 million of these bonds it will report:

Question

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If Townson Co. calls $20 million of the bonds, they will have to pay $20.8 million (20 million x 104% call price). However, they will only receive $18.8 million (20 million x 94% market price), resulting in a loss of $800,000.