I'm trying to understand if my rationale behind discount bonds is correct.
Let's say Company X issues a 2 year $1000 bond at 5%, market interest rate is 10%. Because the coupon rate < the market interest rate, Company X is going to receive strictly less than $1000 for the bond, let's say ($1000 - a).
Now is the rationale behind this because investors could keep their $1000 instead, make 10% off market interest, and so they wouldn't be willing to loan for 5% interest? Therefore, they pay some amount < $1000. Is this correct?
Moreover, how much does the bondholder actually receive in total at the end of 2 years? Does he receive the PV of future cash flows of the principal ($1000) and the interest ($1000 * 2.5% semiannually)?