Business, Legal & Accounting Glossary
Senior discount notes are debt securities for which the debt holder possesses a claim senior to those of other of the company’s debt holders should the company be liquidated or cease to function as a going concern.
Discounted means they’re like zero-coupon bonds. The interest expense associated with the debt isn’t paid out in cash every year, it accrues and is paid out at maturity (the end of the bond’s life). If it’s a 10% discounted bond, principal of $100 million, due in ten years, that means you, the lender, give me $38.554 million today, and I promise to pay you $100 million ten years from now. The yield to maturity on a 10% bond bought at par, with interest payments reinvested, can be found by taking the principal amount and compounding it by the rate of interest over the given time period. The difference between the principal amount (the face value of the note) and the cash received by the borrower today is the discount.
The term “senior discount notes” can also refer to notes that seniors write to remind themselves to ask for a senior discount.
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This glossary post was last updated: 28th November, 2021 | 0 Views.