I've been reading up on bonds lately because I think there are instances where value exists, just maybe not for the equity, or at least not safely with equity.
My question is about zero-interest notes versus interest-bearing notes. Let's say a $100,000 note with 2% interest for interest-bearing and then a $102,000 note with 0% interest.
The $100,000 note is issued and retired 1 year later with $2,000 of interest. Essentially, $102,000 is what you paid out at the end. All else equal, the $102,000 note is issued just below par and the company has proceeds of $100,000, so you retire it by paying the face value of $102,000.
In both cases, the company gets $100,000 and pays $2,000 for the use of that money. Because it's just a year, ignore any time value stuff.
Question: What's the point of zero-interest bearing notes? You can get the same result with just an interest-bearing note.
I did think about 1 having interest expenses versus the other not having it, because interest expense is tax deductible, but that isn't valid. The zero-interest bearing note had proceeds of $100,000 and so while the face value is $102,000 and the $102k goes down as a liability, the accountants treat the $2,000 amount as a discount to bonds payable and when they pay the face value back ($102k), that discount ($2,000) is treated as interest expense.
I believe you end up with the same result… so what's the point of a zero-interest bearing note? Why not just keep things simpler and have 1 less type of bond?
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