The Wall Street Journal reported (8/21/2009) that many companies took advantages of the depressed market values of their own debt, and bought their own bonds at sleep discounts to the debt’s face value. Companies such as Beazer Homes, Harrah’s Entertainment, and Tenet Healthcare saw that the 2008-2009 crisis in the financial markets had depressed the trading value of their own debt and purchased the debt “on the cheap” to save millions of dollars in principal and interest payments.
Required:
(a) Explain how the market values of these companies’ long-term debts could decrease in an economics environment where interest rates were also decreasing.
(b) What advantages would a company experience by retiring its debt for less than face value?
(c) How would the financial statements be affected by such a transaction?