Finance: What is a Deep Discount Bond?

What is a Deep Discount Bond? Bonds are priced in accordance to maturity, coupon, and rating, which all affect the yield. If any of these factors results in a yield less than bonds that are otherwise similarly categorized, it will be discounted in the market compared to its peers. A deep discount bond will be the result of one of the variables having a larger variance than normal, such as the bond’s rating getting lowered or the coupon getting stripped. As a result, the price will be substantially less than its peers’ due to the calculated increase in risk or decrease in return.

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Transcript

00:22

Yeah at the surface where the flying things hang out

00:25

a lot you know up there that's par one hundred

00:28

cents on the dollar crowd but down here lives the

00:31

deep discount bond crowd and we have our own set

00:34

of rules So who are we Well we're the shipwrecks

00:37

the fallen overboard phone companies that didn't work where Puerto

00:42

rico and where Greece where the failed the losers les

00:46

miserables well this guy used to yield five percent Now

00:50

he trades for just twenty cents on the dollar He's

00:52

so angry because well he thinks he should be up

00:55

there on the surface at par But no the street

00:58

has thrown him out and well he sank No michael

01:01

phelps there they don't believe that newspapers on paper are

01:05

ever going to be a thing again So ironically they

01:08

don't even want his paper sad while he thinks he's

01:11

a big bargain He's Still paying his coupon five cents

01:15

on the hundred cents on the dollar schedule five percent

01:18

Yeah only now you khun by that five cents a

01:20

year for one fifth of the price Twenty cents That's

01:24

right twenty cents for a dollar of par or you

01:27

get five times the yield Yep five times five percent

01:31

yield or twenty five percent When you're buying that one

01:33

hundred cents on the dollar our value for only twenty

01:36

cents Yeah crazy high yield if he pays if it

01:39

continues to yield the alec he may stop We don't

01:42

know Well oops Here comes another Who a ten cent

01:45

on the dollar ouch coupon here is six percent So

01:47

the yield well if it pays is now sixty percent

01:51

crazy crazy high and clearly nobody believes the coupons going

01:55

keep in there but deep discount bonds down here have

01:57

another strange thing that people wake up They're in the

02:00

sun shining land of par Don't think about appreciation meaning

02:04

that well let's say that sears reinvents itself and becomes

02:07

a coffee selling kid love an amusement park and the

02:11

ten cent on the dollar bonds which paid sixty percent

02:14

Yield Now Yeah here's the math Well what happens if

02:17

they go all the way back up to par Well

02:20

you've made your interest of course but you'll also make

02:23

a ten times the money on the investment yourself right

02:26

invested a dime and go back to pa ra tha

02:29

dollar well And then everyone will be singing singing under

02:33

the park under the par do dahlia under the sea 00:02:36.728 --> [endTime] and forget that