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The Tony Hawk Skate Park was built in early 2017. The construction was financed by $10 million of 5% bonds issued at face value, due in 10 years, with interest payable on June 30 and December 31 each year. The park did well initially, reporting net income in both 2017 and 2018. However, the discussion at the executive board meeting in late 2020 focused on falling skate-park revenues and increasing maintenance expenses. While several ideas were proposed, Jim Trost, the VP of finance, had an intriguing short-term solution. Jim stated, “Interest rates have steadily climbed the past three years. At the current market interest rate of 9%, we could repurchase our bonds for just under $8 million, recording a gain of over $2 million on the repurchase. We could then reissue new bonds at the current 9% rate.”
From a business standpoint, do you agree with this idea? Why or why not?
Is it ethical to time the repurchase of bonds in 2020 in order to include a $2 million gain on repurchase in a bad year? What if the transaction is fully disclosed?
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