On January 1, 2020, California Corp. Issues $50 million face value bonds with an 8% coupon rate. The interest is paid semi-annually for a term of five years. Investors want a 10% rate of return for bonds of equivalent risk.

Compute the bond price at 1/1/2020.

Prepare an amortization table for the bond through maturity. You may use Excel. Label the columns!

So at the end of the third year after the interest payment date, the market rate for bonds of equivalent risk is now 12%. How much would california pay to redeem these bonds on the open market (i.e., what is the price for all the bonds right now)?

Would this be a gain or a loss on the books? Write the entry to redeem the bonds.

Where is the gain or loss, if any, reported in the financial statements? (consider them all)

At the end of the third year after the interest payment date (like in #3), if california issues new bonds to refund the bonds (i.e., pay them off exactly) that carry a coupon rate of 12% for the remaining life (how many periods?) of the bonds, at what price would these be issued?

Would this be a premium, discount, or par?

Now let us consider the cash flows: for the new bonds, how much cash would be paid out on interest over the term of the new bonds? How much cash would be paid in total over the term?

If we had NOT redeemed the bonds, how much total cash would california have paid out on interest for the remaining two years (4 interest periods) of the bonds term? How much cash would be paid out in total over that two-year term?

So what is the difference in the total cash payments between keeping the old bond until maturity and the cash flows if we refund the bonds?

Now compute these

The difference between the cash interest payment each period for the original bonds and the newly issued bonds. Is this a savings or more cost?

What would be the present value of the difference in the cash interest payments?

What is the difference in the maturity amounts between the original bonds and the newly issued bonds? Is this a savings or more cost?

What is the present value of the difference in the maturity amounts?

What is the difference between the present value you found in 10b. and 10d.? what is this difference likely due to?

So is there any real economic gain or loss from early redemption of debt? How do we find the gain or loss on early extinguishment of debt? Does this remind you of other gains or losses were computed this semester? So how should these gains and losses be interpreted? What concept drives why we have the gain or loss?

NOW consider this: What is the difference between the total interest EXPENSE (not the cash flows) left on the old bonds and the total interest expense for the new bonds? (this is not discounted)

Discuss this difference in relation to any apparent gain or loss you computed in #5 and #9is there really a savings from the refunding????

Would this difference be recorded under GAAP?

I PRIMARILY NEED #8-12