Harter Corporation issued 10-year 8% \$100 million coupon bonds in 20X5. In 20X5, the market interest rate was 6%. The current market interest rate is 9%. Harter has generated unexpectedly strong profits over the last several years. Given a high cash balance, the company is considering repurchasing the entire bond issue. If Harter repurchases the bonds, what is the immediate effect in Harter’s income statement?

A. A loss is recognized.
B. A gain is recognized.
C. No gain or loss is recognized.
D. Insufficient information to determine whether there is a gain or loss.

This is the third example I’ve seen in which, apparently, you want someone here to work out the answer for you.

You’ll learn this a lot better if you try to work out the answer yourself. And you’ll get a lot more help from people here if you demonstrate that you have put some effort into these questions, rather than simply asking us for help.

Frankly, it feels as if you’re asking us to do your homework for you. These aren’t CFA Institute questions.

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I have no idea why the answer is b but not c

It’s b because they’ll recognize a gain.

It’s not c because they’ll recognize a gain.

Have you done any calculations on this? If so, show us what you’ve done. If not, do some, then show us what you’ve done.

Hint: Look at the YTM compared to the coupon and tell us what happens to the value of the bond.

The bonds were issued at a premium in 20X5 because the 8% coupon rate exceeded the 6% market interest rate. Since the current market interest rate of 9% is above the coupon rate, Harter can repurchase the bonds at a price below the carrying value. When the carrying value exceeds the reacquisition price, a gain is recognized in the income statement.

I hope this will be the answer

More specifically, the current market rate is above the rate when the bonds were issued.

They would report a gain even if current market rates were 7%.

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I’m doing my msc in applied finance and my course is very similar to cfa which is why I decided ask you all. Hope you all understand. Is just that I have too much to study.

Thanks so much for your explaination

My pleasure.