Another option for financing is to call in the outstanding bonds you have issued and obtain a loan with more favorable terms than the bonds you would issue. Presently, the company has a 6% coupon bond that matures in 11 years. The bond pays interest semiannually.
What is the market price of a $1,000 face value bond if the current rate of interest is 12.9%?
How much will it cost the company to call in 1,000 of these bonds? Is it worth pursuing this strategy if your interest rate on a loan is 13%?
Concept Check: When you purchase a bond at par your present rate of interest is not changed from the rate of interest at issue of the bond. If the bond is selling at a discount that is because interest rates are higher than when the bond was issued. If the bond is selling at a premium that is because interest rates are lower than when the bond was issued.
Helpful Hint: The coupon rate of a bond never changes when calculating PRICE; only market interest rates change.
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