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Consider ABC Aviation Corporation, a subsidiary of XYZ Aviation Corporation, sold some securities to the public on June 15, 2017. The securities were...

Consider

ABC Aviation Corporation, a subsidiary of XYZ Aviation Corporation, sold some securities to the public on June 15, 2017. The securities were bought and sold on the New York Stock Exchange. The terms of the deal are as follows:

  • Promise to repay the owner of one of these securities $100,000 on June 15, 2047
  • The securities DO NOT pay interest
  • ABC has the right to buy back the securities on the anniversary date at a price established at the time of sale
  • Investors paid ABC $24,500 for each of these securities

Discuss

  • Why would ABC be willing to accept such a small amount today ($24,500) in exchange for a promise to repay approximately 4 times that amount in the future?
  • What impact does the buyback feature have on the desirability of the investment?
  • Would you be willing to pay $24,500 in exchange for $100,000 in 30 years?  What would be your key consideration in answering yes or no?
  • If the U.S. Treasury had offered basically an identical security, do you think it would have a higher or lower price? Why?
  • If you looked at the New York Stock Exchange price of the stock TODAY, do you think the price would exceed the $24,500 original price? Why?
  • If you looked in the year 2025, do you think the price would be higher or lower than today's price? Why?

Top Answer

The securities issued by ABC are basically callable zero coupon bonds. A zero coupon bond does not pay any coupon... View the full answer

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