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I have found this bond issued by Austrian company Do & Co: 3,125% DO & CO-Anleihe 14-21.

As I understand, if I buy it now at 93.77 EUR, I will get 100 EUR on March 4, 2021. Is that true or is there some issue which I don't see?

If it would be that easy to gain around 6% in 5 months, why is that bond so cheap?

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    "why is that bond so cheap?" -- usually that is because there's a significant risk that there will be no payout because the company is failing.
    – Pete Becker
    Oct 2 '20 at 12:35
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Acually, you'd receive 103.125 in 6 months since the bond pays an annual coupon of 3.125%. You'd also pay about 97 for the bond based on the ASK price since you'll need the pay the amount of the coupon that's accrued to date (bond quotes do not include accrued interest), but that's still an annualized yield of about 19% according to your link.

When a bond sells for below par, it means that it pays an interest rate lower than the equivalent rate for other bonds of equivalent risk. Since this bond pays a decent interest rate, a price 6% below par means that the market thinks there is a significant risk of default in the next 5 months. So there's a chance you'll get less than the full face value, and a very small chance you'll end up with nothing.

Given that the company is in the catering business during a global pandemic, it may just be market sentiment towards the industry itself, and not something specific to this bond, but there's not anything obvious either way.

Just like individual stocks, individual bonds can carry significant risks specific to that company. You'll most likely get the yield promised by the price, but if you're not willing to take the risk of larger losses, then stay away (i.e. don't bet the family mortgage or your entire retirement plan on it).

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  • I was wondering .. in the example, I buy one for 93.77 (let us set aside the coupon issue for now), and there is 152 days to go. DS, let us say 20, 40 80, 100, 120 days pass. So now only 32 days to go. Thank God, no bankruptcy so far. In fact, typically, would the price have gone up?! nearer to the safe "100" ? Since, only 32 days left? More days pass .. only 2 days to go .. Thank God, still no bankruptcy or quakes .. would it now be at or very near 100? (I have never dabbled in bonds and know nothing of them.) Cheers ..
    – Fattie
    Oct 2 '20 at 13:02
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    @Fattie Yes, all else being equal, bonds tend to be "pulled to par" as they get closer to maturity.
    – D Stanley
    Oct 2 '20 at 13:09
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    unreal, I can now use that phrase to sound like I am knowledgeable !!
    – Fattie
    Oct 2 '20 at 13:17
  • Thanks for that comprehensive answer! Just where do you see an ask price of 97? As far as I see, it was sold today at 94 ?
    – askolotl
    Oct 2 '20 at 16:55
  • @askolotl I see an ask of 96 currently, and you'll have to pay about 1.82 of accrued interest (3.125 * 7/12)
    – D Stanley
    Oct 2 '20 at 17:10
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As a general rule, when you look at the price of a publicly tradeable security, assume it is fairly priced. If a market is reasonably efficient, then any public information about the underlying company or commodity is incorporated into how professional traders feel about the future profitability of that thing. You could argue that this isn't always the case - for example, maybe TSLA is overpriced because 'the market' is too optimistic about the future government approval of Full Self Driving. But there will be other people who agree with you about that, and are also trading accordingly. Maybe if that wasn't a risk, TSLA would be double the price right now.

So if you assume everything is fairly priced, why is the bond you're looking at so attractive? Risk. Some people want a 'sure thing', and get a government bond paying 1%. Some people are okay with a 2% chance that they lose their investment, and so they are happy to take an extra 4% return. The point is that if you are in a position to accept risk, then you can get higher (on average) returns for it, because volatility is a bad thing, that people will pay to get rid of. The higher the premium you would receive for taking someone's risk, the bigger the warning - in the case of your bond link, this is a sign that the market strongly dislike's the risk associated with the chance of getting full repayment.

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  • Can we assume that the market also gives more risky bonds higher expected returns?
    – user253751
    Oct 2 '20 at 15:31
  • @user253751 Yes precisely - an efficient market should assign a higher required return to a riskier asset [that is, an asset with a greater degree of variance between possible outcomes, like a risky biotech stock that could appreciate 10x or go bust in the next 3 months depending on project outcomes, vs a low risk treasury bond that gives an exact known interest payment unless the entire US government collapses]. Otherwise, no one would want to take on the riskier assets, they would prefer to take safer assets.
    – Grade 'Eh' Bacon
    Oct 2 '20 at 15:52
  • In fact, it is because fewer people want risky assets that demand for those assets decreases, and in therefore given the decreased demand, those looking to sell must lower their price if they want to get rid of the risk. For example: the OP has found an asset that has a lower purchase price than implied by standard market interest rates, because no one wanted to buy it at a higher price [and if anyone would buy it at a higher price, of course the sellers would happily give it to them for that higher price, but we can see that the price is what it is].
    – Grade 'Eh' Bacon
    Oct 2 '20 at 15:54
  • The context of my question: I was imagining someone with a long investment timeframe buying as many of the highest-yield assets as they can, with the understanding that even though a whole lot of them will fail, they'll still come out with more money in the very long run.
    – user253751
    Oct 2 '20 at 16:11
  • @user253751 Again, you're exactly right - the longer your time horizon [length of time you are able to keep funds invested before you need to actually sell and use the cash], the higher risk you are likely to want. For example, someone in their 20's putting money into their 401k should strongly consider almost pure equity investments [likely in the form of simplified index funds], which might earn 7% on average after inflation, which doubles in value about every 10 years, meaning if you have 40 years to retire, you get significant value increase.
    – Grade 'Eh' Bacon
    Oct 2 '20 at 16:54

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