Well that is interesting.... and very canny.
With borrowing rates so low overall, and with Apple's strong cash position, they will be paying virtually no interest on the bonds. It's almost free money.
At the same time, they are taking whole bunch of shares off the market, which makes the remaining shares more valuable. If the value of the shares increase by more than the interest rate Apple is paying on the bonds then they are making money.
For example. They borrow $400 at 2% interest. They buy $400 worth of stock back (say one share). In a year they sell that share back into the market - but lets say that the share price has increased in that year by 10%. Apple sells that share back into the market at $440, and pays the bond holder $8. Apple increases its value by $32 - which I believe is tax free since it's not earned income (even though the $8 interest payment is a tax write-off as a business expense).
This of course all is predicated on Apple stock increasing in value. If you are about to release something pretty cool, it's a good bet. Just the fact you are buying back stock on this scale increases the confidence in a stock and leads to better values.
Very very canny.
With borrowing rates so low overall, and with Apple's strong cash position, they will be paying virtually no interest on the bonds. It's almost free money.
At the same time, they are taking whole bunch of shares off the market, which makes the remaining shares more valuable. If the value of the shares increase by more than the interest rate Apple is paying on the bonds then they are making money.
For example. They borrow $400 at 2% interest. They buy $400 worth of stock back (say one share). In a year they sell that share back into the market - but lets say that the share price has increased in that year by 10%. Apple sells that share back into the market at $440, and pays the bond holder $8. Apple increases its value by $32 - which I believe is tax free since it's not earned income (even though the $8 interest payment is a tax write-off as a business expense).
This of course all is predicated on Apple stock increasing in value. If you are about to release something pretty cool, it's a good bet. Just the fact you are buying back stock on this scale increases the confidence in a stock and leads to better values.
Very very canny.