XYZ Inc. currently has outstanding $1,000,000, 7%, 10-year bonds that pay interest semiannually. These bonds were issued five years ago at their face amount. The company is considering redeeming these bonds at 103 and issuing new $1,000,000, 5%, 5-year bonds at their face amount. The new bonds would also pay interest semiannually.

Answer the following questions:

1. Provide at least one advantage and one disadvantage of financing using bonds.
2. What are the costs of redeeming the existing bonds? List at least one effect on the financial statements of redeeming the bonds.
3. Is redeeming the bonds and issuing new bonds a good financial decision in this case? Support your opinion.