Trojan Corporation issued a bond on January 1, 2003. Interest on the bond was payable annually at December 31. The bond had the following characteristics:
- Term of bond in years 10
- Face amount of the bond $100,000
- Stated interest rate 10.00%
At the time the bond was issued, the market rate of interest was 9%, compounded annually.
Required:
On January 1, 2005, Trojan repurchased (redeemed) the bond from the bondholders when the market rate of interest was 11%, compounded annually.
1. How much gain or loss would Trojan recognize on the transaction?
2. What would be Trojan's overall net cash flow with regard to the bond over its entire life, from the time they issued it until the time they bought it back? That is, would Trojan give the bondholders more or less total cash than they give Trojan? How much more or less?
3. What would be Trojan's overall net income before taxes with regard to the bond over its entire life, from the time they issued it until the time they bought it back? Consider both the interest expense and any gain or loss on repurchase of the bond.