Explaining Why Debt Is Sold at a Discount
The annual report of American Airlines contained the following note:
The Company recorded the issuance of $775 million in bonds (net of $25 million discount) as long term debt on the consolidated balance sheet. The bonds bear interest at fixed rates, with an average effective rate of 8.06 percent, and mature over various periods of time, with a final maturity in 2031.
After reading this note, an investor asked her financial advisor why the company didn't simply sell the notes for an effective yield of more than 8.06 percent and avoid having to account for a small discount over the next 20 years. Prepare a written response to this question.
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