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ShawnA, CPA, Professor, CFP. CGMA, Business Consultant, Professor, PFS
Category: Single Problem
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In layman's terms why would a company sell bonds at a disc

Customer Question

in layman's terms why would a company sell bonds at a discount?
Submitted: 2 years ago.
Category: Single Problem
Expert:  ShawnA replied 2 years ago.
Because they have to. Say they issued bonds that payed a 5% rate of return. a 10,000 bond that pays 5%. Then interest rates climb (by the time the bonds get fro m the drawing board . through legal, sec, etc. NOW the interest rate is 7%. Who would but my bond at 5% when you could get a newer 30 year bond at 7%? Almost 50% more. The other reason is just as simple. If you bought a 10, 000 face value that matured 20 30 years, what's the difference between issuing it at 10,000 with 5% interest or just selling it for (I'll make up a number without doing the math) 8,000? wither way I sell 8 bonds at 10,000 or 10 bonds at 8,000 . Either way I collect 80,000 TODAY. Wither way I spend $x on interest over the next thirty years. It's the same to me. Maybe some body (psychology) feels better paying 8,000 for something that will grow to 10,000. Maybe someone else is better investing 10,000 knowing he gets 5% interest a year. I'll offer you a telephone discussion. Most people prefer this to texting back and forth. All you need do is accept the offer. Otherwise we can text back and forth.
Customer: replied 2 years ago.

This is very vague. My assignment is to help another confused student via memo, explaining why and under what conditions a company would issue bonds at a discount. I need to be complete,with an easy-to-understand explanation, as concisely as possible. The other student missed a class so I have been assigned to clear this up ASAP.

Expert:  ShawnA replied 2 years ago.
These seem like two different requests. I am confused as you asked for a "laymans explanation as opposed to your new request.
Expert:  ShawnA replied 2 years ago.
I will draft a memo for it and post it later today