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Good day tutor,
Could you Kindly correct me if I am wrong on this:
If a company wants to pay a coupon rate that is lower than investors’ expectations, it will need to issue bonds at a discount. This means the company will get less than $100 per bond unit it issues depending on the amount of discount. Thus to raise the money required, it will need to issue more bond units (assuming there will be a full take-up). Upon redemption, it will have to redeem the bonds at $100 per unit no matter what.
If that is right, I just do not understand how bondholders will benefit from it by selling on the traded exchange to other investors when they previously took up the bonds at and paid the company the discounted price?
What you have written is right.
The market value on the stock exchange will be the PV of the future interest receipts and the redemption amount. Obviously that value can go up and down depending on what happens to the investors required rate of return – that is the same will all investments. However, if the required rate of return were to remain unchanged, then as they get closer to the redemption date the PV (and therefore market value) will increase.
(For example, 100 receivable in 2 years has a higher PV than 100 receivable in 8 years)
I see, it is all finally connecting now. Issuing bonds at a premium goes by the same logic – the company will get the face value+premium amount for each bond unit and thus can issue fewer bonds to raise the required funds, right? Thank you so much!
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