A Discount | Buying Bonds At

Fast forward five years. The utility company hadn't just survived; it was thriving. As the "fear" evaporated, the bond's price climbed back toward its $1,000 face value.

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 . 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. Fast forward five years

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. Arthur wasn’t a gambler, but he loved a good fire sale

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.

The year was 1994, and the sleepy town of Oakhaven was about to learn a lesson in "the art of the discount" thanks to its most eccentric resident, Arthur "Penny" Penhaligon.