Retiring Debt Early
Smith & Company issued $80 million maturity value of 5-year bonds, which carried a coupon rate of 6% and paid interest semi annually.
At the time of the offering, the yield rate for equivalent risk-rated securities was 8%.
Two years later, market yield rates had risen to 10%, and since the company no longer needed the debt financing, executives at Smith & Company decided to retire the debt.
Calculate the gain or loss that Smith & Company will incur as a consequence of retiring the debt early.
Is the early retirement of the debt a good decision if Smith & Company does not need the financing?