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December 1, 2015 at 3:45 pm
In the case of zero-coupon bonds or bonds issued at a discount, if after incorporating the time value of money what if I don’t gain much or don’t gain at all as the $100 that I will be getting at repayment are the same as the $50 or any other amount that I invested in initially.
John Moffat says
December 1, 2015 at 4:34 pm
The price that investors would be prepared to pay for the bond would (as always) be the present value of the future expected receipts (in this case $100) discounted at their required rate of return.
Because of the extra risk involved in investing in zero coupon bonds they would require a high rate of return.
If they were asked to pay a higher amount than the PV, then they would simply not be prepared to buy them.
December 2, 2015 at 3:54 pm
If that’s the case ie the price that investors would be prepared to pay would be the present value of the future expected receipts, then in the long run they don’t end up being better off or worse off since $50 invested today would be $100 upon repayment after say 5 years. But since they are taking a risk by investing in zero coupon bonds they would obviously want a higher return and would want to end up being better off.
Is my understanding correct?
December 2, 2015 at 5:24 pm
Investing 50 now and getting back 100 later means that they are better off!
They decide what % return they need, they discount the 100 at that required return, and that is then the price they will pay. If the PV were to be 50, then paying 50 now and getting back 100 in 5 years would mean that they were getting the rate of return that they required.
December 4, 2013 at 1:48 pm
I need a little clarification. The company repays $5 interest per year but what does the 6.25 % interest means(5/80*100)? Do they give the debenture holder this amount as the large discount?
December 4, 2013 at 1:53 pm
The company is paying 5% on the nominal value.
However if investors are prepared to pay $80 on the stock exchange in order to get $5 a year interest, it must mean that they are currently requiring a return on 5/80 = 6.25% (because it is investors who fix the market value – if they wanted a higher or lower return they would fix a different market value).
October 2, 2013 at 5:36 pm
A VERY GOOD LECTURE BUT THE LECTURER’ VOICE CANNOT BE HEARD QUITE WELL. I WISHED HE CAME CLOSER TO THE MIC
October 2, 2013 at 6:01 pm
It was recorded during a live lecture, and I walk around which is what has caused the problem
I will record it again when I have the time.
November 22, 2013 at 1:12 pm
Use earphones/headsets. Helps very well!
May 18, 2015 at 12:07 pm
john i would be very grateful if you could please repeat what you said in the very last minute about the risk involved in zero coupon bonds
May 18, 2015 at 4:53 pm
Because they don’t pay interest, but instead pay a large ‘bonus’ on repayment, the huge risk is that the business might not be able to afford the repayment and therefore go bankrupt!
Businesses issue zero-coupon bonds to save money (no interest) while they are growing. If they do manage to grow then all is fine, but if they don’t then they may face the problem above
Hope that clears it up for you
June 5, 2012 at 12:09 am
The sound of this lecture is very poor but otherwise the content is rich
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