Effects of change in interest rate on debts and Early Retirement of Debt

Effects of changei n interest rate on debts
Changes in bond value due to changes in interest rates are not reflected in the value of bond liability.

Analysts should:
· Consider the market value of debt in the financial analysis.

Early Retirement of debt
At bond’s maturity: decrease in cash and LT liability, market value = book value

Early retirement of debt:
· The carrying value of debt liability minus the price at which it is purchased back is recorded as an extraordinary item (below the operating line, net of tax), because:
· This gain/loss is not due to the firm’s performance,
· The cause behind the gain/loss (change in interest rates) could have occurred in a different period. The gain or loss may signal an earnings change in opposite direction, that is
· If the company generate gain by retiring old low interest debt at a market price well below bookvalue (bought back at price below book value), but if it raises the proceeds by borrowing at current higher interest rate =>increase interest expense.;
· If the company generate loss by retiring old high interest debt =>can borrow at low current interest rate debt.