Arlington Corp Issued $7,000,000, 5% 6-Year Bonds on January 1

question 5

Essay

Arlington Corp issued $7,000,000, 5% 6-year bonds on January 1, 2019 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, 2023 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.

---

Definitions:

Intuitive Judgments

Decisions or assessments made based on gut feelings or instincts rather than analytical reasoning or explicit reasoning.

Arbitrary

Based on random choice or personal whim, rather than any reason or system.

Conditional Probability

The probability that one event will occur on condition that another event occurs.

Six-Sided Dice

A cube-shaped object used in many games, which contains six faces numbered from 1 to 6, each face showing a different number of dots representing numbers.