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).
Related or Semi-related Video
Finance: What is Equity Kicker?8 Views
Finance allah shmoop what is an equity kicker It's that
it's hiked it's up It's good Okay yeah You knew
we were going to start their well in finance Land
and equity kicker is usually a deal sweetener for debt
or lenders So shmoop akane valley bank loans whatever Dot
com five million bucks at eight percent interest but with
a catch and not a football catch get down The
bank doesn't feel that eight percent is enough to cover
the risk and well other craft that whatever dot com
brings with it they ain't google So in addition to
the eight percent interest shmoop akane valley bank wants an
equity kicker in the form of us A three percent
warrant coverage That is they want three percent of the
value of the loan of five million bucks or one
hundred fifty thousand shares or warrants to buy a share
It's like a really cheap price The option of whatever
dot com thrown in as part of the deal those
one hundred fifty thousand shares our equity and they kick
the debt deal to potentially be worth a lot more
Should things go well at whatever dot com but yeah 00:01:09.099 --> [endTime] We're not hopeful
Up Next
What is a Busted Convertible? A busted convertible is a convertible bond that will never be converted to stock because the underlying stock price i...
What are Bonds? The simplest explanation is that a bond is essentially an I.O.U. that is issued by a corporate or government institution to borrow...
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 r...
What does “Buy Minus” mean? Buy minus orders are used when investors think a stock will drop in price for a short period of time and plan to pr...