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By buying at $650, Arthur had unlocked a double-sided gold mine:
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. buying bonds at a discount
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 .
On the day of , Arthur walked into the same diner. He hadn't just collected high interest for five years; he also cashed in on that $350-per-bond capital gain. He bought the whole room a round of coffee and pie, smiling as he explained that in the world of bonds, sometimes the best treasures are found in the "damaged goods" section. AI responses may include mistakes
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.
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. 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.