Arlington Corp Issued $7,000,000,5% 4-Year Bonds on January I,2011 at Par

question 31

Essay

Arlington Corp issued $7,000,000,5% 4-year bonds on January I,2011 at par. Interest is due annually on December 31. The market rate of interest has since increased dramatically to 9%. As such,Arlington can repurchase its bonds on the open market for $6,507,449. They decided to take advantage of this situation,and on January 1,2013 issued a new series of bonds in the amount of $6,507,449 [two-year bonds,9% interest payable annually]. The bonds were sold at par and the proceeds were used to retire the 5% bonds.
Entry for sale of new bonds
Arlington has recorded a gain on the retirement which increases its net income for the year. Ignoring transaction costs and taxation effects,is Arlington any better off? Discuss.

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Definitions:

Consumer Surplus

The difference between the total amount that consumers are willing to pay for a good or service and the total amount they actually do pay.

Consumer Surplus

The difference between what consumers are willing to pay for a good or service and what they actually pay, indicating the economic benefit to consumers.

Equilibrium Price

The price at which the quantity of a good or service demanded by consumers equals the quantity supplied by producers.

Producer Surplus

The difference between the amount producers are willing to accept for a good or service and the actual amount they receive.