Advantages and disadvantages of a FIVE YEAR BOND??

Mikeyabosbht Registered Posts: 19 Dedicated contributor ? ? ?
I am at your mercy and I really need some assistance with this question. It was part of the unit 15 Simulation that I had to redo.

There is no coverage in the Osbone book and I modelled my answer from the Kaplan book.

If somebody could provide me with the pro and cons of this source of finance from the point of view of the borrower, taking into account the five year timescale.

I had to redo as my answer was considered to "general".

Thanks so much for any answers.


  • sdv
    sdv Registered Posts: 585
  • SandyHood
    SandyHood Registered, Moderator Posts: 2,034
    sdv's given a good link for investing in bonds

    I think this is a bond as a source of funds question
    You need to look at the detail, but here are some ideas:
    1. Does the bond provide a "holiday" or "interest only" annual/monthly payments? If so, this will ease the pressure on cash flow in terms of allowing the borrowing firm more time to pay back the principal borrowed.
    2. Does the bond require a much larger repayment than the principal? If you calculate the APR on the amount borrowed (principlal) does it work out as a very high % compared with the market rate?

    Can you see a similarity with the various forms of mortgage you (or your friends) might face if you wanted to finance the purchase of a house?

    I will cover this topic in an online series of classes in January.
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  • Mikeyabosbht
    Mikeyabosbht Registered Posts: 19 Dedicated contributor ? ? ?
    Thanks a lot for your reply.

    I think the question was regarding a "Deep discount" or "zero-coupon" bond.

    It was a sources of finance question for a company who faced a cash deficit and needed to raise finance.
  • SandyHood
    SandyHood Registered, Moderator Posts: 2,034
    Have you checked your text books?
    A deep discount bond is the sort of thing I described. The investor (or lender) provides the finance you need now (say £1,000,000) and as there is no interest to pay each year they receive the face value say in 5 years time.
    If the face value is £3,000,000 then you can work backwards to find the APR that would apply and compare this with other forms of finance.
    The APR here is 24.57% (nearly 25% per year) and as such looks high to me. There may be other lower rates available.
    However, you can bear in mind the advantage the business gains by not having to pay interest annually (or monthly for that matter) for 5 years.

    So it is +ve as far as no cash to pay for 5 years but -ve as far as the interest payable when it is repaid.
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