Bonds pay interest based on the expected inflation rate until maturity, plus a fair risk premium over inflation based on the riskiness of the bond.
During the quarter, Smithfield refinanced high interest bearing debt with new debt at a much lower interest rate and a longer maturity, thus reducing interest expense by 6%.
The fact that early bonds had no fixed maturity date ensured that any change in interest rate was fully reflected in the capital value of the bond.
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For one thing, it is hard to know how much companies have in fact lengthened the maturity of their debts because the interest-rate swap market allows them to swap those fixed bond payments into cheaper floating debt, a popular strategy in the investment-grade market.
It measures what the return on a bond is if it is held to maturity and all coupons are reinvested at the YTM rate.
What was announced was a maturity extension of the arrangements and a reduction in the interest rate charged.
The recent action was to extend their maturity (to February 1, 2013) and lower the rate from the U.S. dollar OIS (overnight index swap) rate plus one percent to plus one-half percent.
All things equal, for typical bonds the longer the maturity the higher the duration (or price volatility from interest rate movements), and the smaller the coupon the higher the interest rate risk.
That rate would equate to a 12.23% annual earnings growth rate, which is supremely impressive considering the size and maturity of the company.
However, this rate really does not matter if you hold the bond to maturity.
Germany sold 4.17 billion euros of negative interest rate two-year German bonds drew the strongest demand since a January sale of a similar maturity as investors sought new places to hide their money, even if it means losing some of it.
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