Buying Bonds At A Discount ❲2024-2026❳

Bonds have a legal obligation to pay back the full $1,000 at the end of their term. Arthur was essentially buying a future $1,000 for a $350 discount.

By buying at $650, Arthur had unlocked a double-sided gold mine: buying bonds at a discount

The town gossips at the diner laughed. "Arthur’s buying debt in a sinking ship," they chuckled. But Arthur had read the fine print. He knew the utility’s assets were solid and that the "sinking ship" was just undergoing a very expensive repair. Bonds have a legal obligation to pay back

The bond still paid a fixed interest rate (coupon) based on the original $1,000. While new buyers were getting 5%, Arthur’s effective yield-to-maturity was nearly double because he had paid so much less for the same interest check. "Arthur’s buying debt in a sinking ship," they chuckled

Fast forward five years. The utility company hadn't just survived; it was thriving. As the "fear" evaporated, the bond's price climbed back toward its $1,000 face value.