Buying Bonds At A Discount -

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.

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. buying bonds at a discount

By buying at $650, Arthur had unlocked a double-sided gold mine: The bond still paid a fixed interest rate

Arthur wasn’t a gambler, but he loved a good fire sale. While everyone else was chasing the booming tech stocks of the early 90s, Arthur was digging through the wreckage of a massive regional utility company that had suffered a catastrophic (but ultimately fixable) technical failure. Its corporate bonds, originally issued at a of $1,000, had plummeted to $650 . "Arthur’s buying debt in a sinking ship," they chuckled

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.