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Retiring Debt Early and Repurchases

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On January 1, 2004 Roland Inc. issued $124 million of 8% coupon bonds at par. The bonds pay interest semiannually on June 30 and December 31 of each year, and they mature in 15 years. On December 31, 2005 (one day before the next interest payment is made), the bonds are trading at a market yield of 12% plus accrued interest.

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1. Suppose Roland Inc. repurchased the entire $125 million bonds for cash at the market price on December 31, 2005. Using a 40% corporate tax rate, how much of a gain or loss would the company record on this transaction.

2. Why might the company want to retire the debt early?

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