Reference no: EM132588508

On August 1, 2018, Yellowknife Inc. sold 8%, five-year bonds with a maturity value of $ 2,000,000 for $ 1,964,000. Interest on the bonds is payable semi-annually on August 1 and February 1. The bonds are callable at 104 at any time after August 1, 2020. By October 1, 2020, the market rate of interest has declined, and the market price of Yellowknife's bonds has increased to 102. The company decides to refund the 8% bonds by selling a new 6%, five-year $2,000,000 bond issue to mature in five years, sold at 95. Interest on this new bond is also payable semi-annually on August 1 and February 1. Yellowknife begins to reacquire its 8% bonds in the market and is able to purchase $ 600,000 worth at 102. The remainder of the outstanding bonds are acquired by exercising the bond call feature.

Instructions

Assume the carrying value, including unamortized discount, of the 8% bonds was $1,979,600 on October 1, 2020. Show all calculations.

Question 1. Calculate the total re-acquisition price

Question 2. Calculate the gain or loss on the redemption.

Question 3. Do you recommend Yellowknife to redeem the 8% bond and reissue a new series of 6% bonds? Justify your recommendation.