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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Finance: What are Bonds?393 Views
Finance a la shmoop what is a bond? well a bond is your word your promise your [Women shake hands]
handshake your John Hancock on a contracted piece of paper your mortgage
your credit card debt yeah their bonds to your "I swear I'm not a deadbeat"
declaration... that's your bond right well bonds come [Man lying on a sofa]
in many complex flavors and compositions simply put bonds are loans aka debt you
borrow money or you promise or you you bond that
you'll pay it back when you borrow money the amount you borrow is called the
principal you pay rent on that amount borrowed and that rent is called [rent appears at bank]
interest to the entity loaning you the money that interest is called yield
thank you very much for the yield like if the lender rents you a grand for a
year and you pay them a thousand 80 bucks at year-end paying back the
principal and then the rent on the money while the lender will have had a yield [Yield of lender appears]
of 8% on the grand that they loaned you so that's a bond you borrow money you
pay it back and if you don't the person who loaned you the dough well they [Person stamped with property of shmoop bank]
generally own your tuchus and yeah you know what Shakespeare said about bonds
yeah that's what he said so if you don't really know what you're doing don't do
it...
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