ABC Aviation Corporation, a subsidiary of XYZ Aviation Corporation, sold some securities to the public on...

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Finance

ABC Aviation Corporation, a subsidiary of XYZ AviationCorporation, 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 $100,000on June 15, 2047
The securities DO NOT pay interest
ABC has the right to buy back the securities on the anniversarydate at a price established at the time of sale
Investors paid ABC $24,500 for each of these securities
Why would ABC be willing to accept such a small amount today($24,500) in exchange for a promise to repay approximately 4 timesthat amount in the future?
What impact does the buyback feature have on the desirabilityof the investment?
Would you be willing to pay $24,500 in exchange for $100,000 in30 years? What would be your key consideration inanswering yes or no?
If the U.S. Treasury had offered basically 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 stockTODAY, do you think the price would exceed the $24,500 originalprice? Why?
If you looked in the year 2025, do you think the price would behigher or lower than today's price? Why?

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3.8 Ratings (669 Votes)

ABC is willing to accept such a small amount today ie 24500 in exchange for a promise to repay approximately 4 times that amount in the future mainly due to the concept of time value of money This is because the future value of money amount1rn In this case future value will be 245001r30 30 means 30 years and June 15 2047 to June 15 2017 is 30 years Thus See Answer

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Transcribed Image Text

ABC Aviation Corporation, a subsidiary of XYZ AviationCorporation, 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 $100,000on June 15, 2047The securities DO NOT pay interestABC has the right to buy back the securities on the anniversarydate at a price established at the time of saleInvestors paid ABC $24,500 for each of these securitiesWhy would ABC be willing to accept such a small amount today($24,500) in exchange for a promise to repay approximately 4 timesthat amount in the future?What impact does the buyback feature have on the desirabilityof the investment?Would you be willing to pay $24,500 in exchange for $100,000 in30 years? What would be your key consideration inanswering yes or no?If the U.S. Treasury had offered basically 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 stockTODAY, do you think the price would exceed the $24,500 originalprice? Why?If you looked in the year 2025, do you think the price would behigher or lower than today's price? Why?