Coupon rate is paid on the principal - assuming the hundo is accurate then it’s $5/yr. If you think Motorola will be around in 14 years then you’d have your investment back. If you think they’ll be around in another 70 years you get $350 + $100 because when it matures they need to repay the bond.
It could be, alternatively if the company goes out of business tomorrow you lose.
The question you need to ask yourself is how it will do vs other options, I’m no investor by any means but I’d be wondering:
a) would an index fund beat it long term (historically you might see 7% annual gains on a fund that tracks NYSE over the same period)
b) why is it trading below its face value - everyone has the same information about this bond in theory, therefore bond traders are aware of the same thing, if it was a great deal it would be in demand and the price would rise. So someone more experienced than us has accounted for the return and the risk/reward for them says $80 is right.
c) does it beat inflation - $450 payoff seems nice now (assuming you save up all those $5s) 30 years ago it would’ve seemed even better, but $100 in 1997 has the spending power of $200 today - in 70 years time the $450 might have the equivalent spending power of $100 today. Which is to say your real terms return may only be $20 over 70 years.
Coupon rate is paid on the principal - assuming the hundo is accurate then it’s $5/yr. If you think Motorola will be around in 14 years then you’d have your investment back. If you think they’ll be around in another 70 years you get $350 + $100 because when it matures they need to repay the bond.
That seems quite the deal?!
It could be, alternatively if the company goes out of business tomorrow you lose.
The question you need to ask yourself is how it will do vs other options, I’m no investor by any means but I’d be wondering:
a) would an index fund beat it long term (historically you might see 7% annual gains on a fund that tracks NYSE over the same period)
b) why is it trading below its face value - everyone has the same information about this bond in theory, therefore bond traders are aware of the same thing, if it was a great deal it would be in demand and the price would rise. So someone more experienced than us has accounted for the return and the risk/reward for them says $80 is right.
c) does it beat inflation - $450 payoff seems nice now (assuming you save up all those $5s) 30 years ago it would’ve seemed even better, but $100 in 1997 has the spending power of $200 today - in 70 years time the $450 might have the equivalent spending power of $100 today. Which is to say your real terms return may only be $20 over 70 years.
There seems to be a dispute if it’s 80 cents a piece, or 80% of the initial value?
Anyways, at 80 cents you’d get your money back in a couple of months, at $80 it’s another story of course…
Thanks for the thorough explanation!