CFA CFA Level 1 Financial Reporting and Analysis

Financial Reporting and Analysis

  • Author
    Posts
    • Katapa
      Participant
      Up
      0
      Down

      If a company ISSUES a $10 million bond at 8% coupon pmt annually whilst the market rate is 8.25%, isn’t the initial liability still $10 million even though the rates would suggest that this is a discounted bond/liability? My logic is that If i were to issue a Bond for $10 million i still receive $10 million in cash as liability. 🙁

    • harshit_tahiliani
      Participant
      Up
      1
      Down

      Its pretty unlikely that an issuer would issue at a different rate from market rate, if he does, the face value wouldn’t be the same as bond price… cause this would create an arbitrage opportunity.

      what is the company’s liability? the liability for the company will always be the PV of the FACE VALUE and the coupon payments, because that’s the amount the company will pay to its debt holder at the payment dates..

      now if the market rate is 8.25 and the company is issuing 8% bond, the company will have to issue with a discount.. which means while raising funds through debt, they will raise less than 10mn in cash because they’re offering a lower interest rate (8%) to the public that the rest of the market is (8.25%).

      Hope it was helpful. If anything unclear, please mention. 
      Cheers and all the best!

Viewing 1 reply thread
  • You must be logged in to reply to this topic.