How to Calculate Retirement of Debt Cash Flow to Creditors

by Edriaan Koening; Updated September 26, 2017
The company may have to pay market price for the bonds.

A company may obtain debts to raise funds by selling bonds to investors in the market. The company promises to pay back a certain amount of money to these investors at a certain maturity date. Depending on the type of bond, the company may be able to retire the debt early. It the company retires the debt early, it has to pay an amount of cash that is different from what the company would have paid at the maturity date.

Purchase Bonds

Step 1

Determine the number of bonds the company wants to buy back. The company does not have to retire all its bonds at the same time. For example, it may choose to buy back only half of all the bonds it issued.

Step 2

Check the value of the bond in the market. Investors buy and sell bonds in the open market, so the bond price may fluctuate.

Step 3

Multiply the number of bonds the company wants to buy back by the bond price in the market. This is the amount of cash the company has to pay its creditors to retire the debt.

Exercise Call Option

Step 1

Determine the number of bonds the company wants to retire.

Step 2

Multiply the number of bonds by the exercise price of the call options the company holds. Call options give the company the right, but not the obligation, to purchase the bonds at a pre-specified price. As such, if the exercise price of the call options is lower than the current price of the bonds, the company may benefit from exercising the call options instead of buying the bonds straight from the market. This is the amount of money the company has to pay its investors to retire the debt at the end.

Step 3

Multiply the number of call options by the price of each call option. This represents the call premium the company has to pay to exercise call options instead of buying the bonds straight from the market. The company may purchase the call options before or at the same time as exercising them. As such, this cash flow may not occur at the same time as the actual purchase of the bonds to retire the debt.

About the Author

Edriaan Koening began writing professionally in 2005, while studying toward her Bachelor of Arts in media and communications at the University of Melbourne. She has since written for several magazines and websites. Koening also holds a Master of Commerce in funds management and accounting from the University of New South Wales.

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