Question

Tony Inc. issued 4.5%, 12 year callable bonds with a face value of 12,000,000. The bond was issued for a price of 10,308,294 to yield a market rate of 6.2%. The bonds pay an annual cupon and the coupons are literally paid on 1/1. During late 2017, market interest rates declined to 3.75% and Tony Inc. "called" the bonds on 1/1/18, recognizing a loss of $2,087,333. What's is the redemption price when the bond was paid to call on 1/1/18?

My confusing part is: 3.75% is not required in this Question. Why is it not required ?

Answer 1

Cash interest to be paid to the bondholders will be calculated using the coupon rate that is 4.5%.

Interest expense to be recognized by Tony Inc. will be calculated using the market rate at the time of the issue of the bonds that is 6.2%.

There is no use of the 3.75% in the calculations to get the answer. This rate has been provided in the question only to indicate that the market rate decreased from 6.2% to 3.75% and that is why the bonds are being called on 1/1/18.