Message Font: Serif | Sans-Serif
No. of Recommendations: 2
Just a random example of bond math, fwiw.

Firm issues 4% bonds at par for 10 years, rates stay flat, price is 100 throughout by definition, PV is $67.5 if I've done my math right.

Firm issues 4% at par, rates go to 8%, price falls to $72.8, PV is $33.7, or half of the scenario above, as you'd expect.

Of course, rates won't go up 400bps overnight, just as an example.

BUT, if you can handle the leverage, buying $100 of stock now for price of low-rate, tax-deductible interest, and owe $67.5 in the future

OR if you think rates are destined to rise significantly, for $33.7 in the future + tax-deductible interest, well....seems like you should buyback stock.

N.B. this has nothing to do with GM's Option Egregiousness argument above. Just talking about buybacks at a simplified level.
Print the post  


What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.