Adrenaline Entertainment is struggling financially and its CFO, David Plesko, is starting to feel the heat. Back on January 1, 2017, Adrenaline Entertainment issued $100 million of 6% bonds, due in 15 years, with interest payable semiannually on June 30 and December 31 each year. The market interest rate on the date of issue was 5%. It is now the end of 2021, and David has a plan to increase reported net income in 2021. The market interest rate has risen to 9% by the end of 2021. David wants to retire the $100 million, 6% bonds and reissue new 9% bonds instead.

Required:

1. Calculate the issue price of the bonds on January 1, 2017. Use a market rate of 2.5% (5% ÷ 2), and the number of periods is 30 semiannual periods.

2. Calculate the carrying value of the bonds five years later on December 31, 2021. Use a market rate of 2.5% (5% ÷ 2), and the number of periods is now 20 semiannual periods.)

3. Calculate the market value of the bonds five years later on December 31, 2021. The market rate is now 4.5% (9% ÷ 2) rather than 2.5% (5% ÷ 2), and the number of periods is now 20 semiannual periods.

4. Record the early retirement of the bonds on December 31, 2021. Does the transaction increase net income? By how much (ignoring any tax effect)?

5. Do you think investors would likely agree with David Plesko that the retirement of the 6% bonds and the reissue of 9% bonds is a good idea? Explain why or why not.