1. Profile photo of cecel says

    Hi John,
    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?

    • Profile photo of John Moffat says

      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).

      • avatar says

        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 :)

      • Profile photo of John Moffat says

        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 :-)

Leave a Reply