On March 1, 2014, Bonneville Printers issued long-term debt with a fixed stated annual interest rate of 4 percent and a maturity date of February 28, 2024. The debt was issued at a discount. The company’s financial managers are seeking ways to reduce the risk related to the value of the debt fluctuating over its life as market interest rates change.
a. Explain how the value of Bonneville’s debt would be affected if market interest rates fell in 2015.
b. Advise Bonneville regarding how it could manage this risk, and explain how it would work.