Salem 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 Salem Co. calls $10 million of these bonds it will report:

Question

Salem 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 Salem Co. calls $10 million of these bonds it will report:

Quizplus · Accepted Answer

If Salem Co. calls $10 million of these bonds, it will have to pay the bondholders $10.4 million ($10 million principal + $400,000 call premium). Since the company had previously issued the bonds at a discount, this means that the company will have to pay more for the bond than its recorded value on the balance sheet, resulting in a loss of $400,000.

Salem Co Has Outstanding $100 Million of 7% Bonds, Due in in 7