At A Discount

  

Categories: Stocks, Bonds, Trading

Bonds, when issued, are usually priced "at par" (usually $1,000 per bond) which implies that the buyer is getting a fair deal for lending money to the issuer, relative to other investments of similar risk.

Marty may buy bonds at par value ($1,000) from Doc Brown Scientifics, Inc. (Ticker: FLUX) on Monday, agreeing to loan DOC $1,000 in exchange for $100 interest (a 10% interest rate) for one week, but flash forward to Wednesday, and things have changed. Now, FLUX’s suppliers in Libya are unable to provide it with enough plutonium to fuel operations and FLUX may not be able to pay its debt obligations.

This new level of risk makes Marty wish he had only paid $750 for that bond, instead (while still receiving $100 of interest). If only he could go back in time...If given a chance, Marty would rather not have paid the $1,000 par value, but instead bought that bond for $750. That is, at a discount to par.

If things went the other way, FLUX may have similarly preferred to sell that bond at a premium, receiving more than $1,000 (while still paying just $100 in interest).

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