Final answer:
The decrease in Barber Corp.'s bonds payable does not necessarily indicate a refinancing at a lower interest rate. A bond's price is inversely related to market interest rates. For example, if the market rate rises above a bond's coupon rate, the bond's value will decrease.
Step-by-step explanation:
If Barber Corp.'s balance in bonds payable decreased, it is incorrect to assume without specific information that the bonds were refinanced at a lower interest rate. A decrease in bonds payable could be due to several reasons other than refinancing at a lower interest rate. One possibility is that the company has repaid some of its debt, retirees the bonds at maturity, or bought back some of the bonds before maturity.
When considering changes in interest rates and bond prices, it's essential to understand the inverse relationship they share. Generally, if market interest rates rise, the price of existing bonds falls since new bonds are likely issued at higher rates, making the old ones less attractive. Conversely, if market interest rates fall, the price of existing bonds usually increases.
If we consider Ford Motor Company, which issued a five-year bond with a face value of $5,000 and an annual coupon payment of $150, the bond's coupon rate (interest rate) would be 3% (150/5000 * 100). If the market interest rate increases from 3% to 4%, the value of this bond would decrease because investors can find new bonds with a higher interest rate. Accordingly, they will not be willing to pay as much for the bond with the lower interest rate.