Interest rate environment changes and rates


Wilma is thinking about opening up her own law firm, but she will need some capital to get the practice off the ground. She goes to a bank and borrows $100,000. The loan agreement's terms include a 30 year maturity (she will have to pay the loan back in 30 years), and an annual interest rate of 7%. Assume that 2 years later the interest rate environment changes and rates increase to 10%. The bank now decides it would rather have $75,000 to lend out at 10% than a $100,000 loan on which it only collects 7%. So, the bank notifies Wilma that if she pays back $75,000 immediately, they will forgive her $100,000 loan.

What are the tax implications to Wilma if she accepts the bank's offer?

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Accounting Basics: Interest rate environment changes and rates
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