Smith Inc, a prestigious investment firm, with branches in 30 major metropolitan areas, had achieved most of its success due to its excellent client relations and focus on client support. When the ratings get adjusted downward, the bond becomes less attractive.
Call provisions are attached to bonds so that it allows companies to refinance their debt at lower rates when interest rates drop. Jill knows that the call period and its implications will be of particular concern to the audience. Recently, a large utility company had hired it as the leading investment bankers, for a major corporate bond issue.
Why do the coupon rates for the various bonds vary so much? How should Jill respond? How should Jill go about explaining the relationship between coupon rates and bond prices? Since the YTM is a promise yield with the actual yield being dependent on the reinvestment rate that each investor is able to earn, it is best to compare similar risk bonds on the basis of their nominal YTMs.
In preparation for the seminar, Jill called up a few of her best clients and queried them regarding their awareness of the risk and return potential associated with corporate bond investments.
Jill should explain the relationship between coupon rates and bond prices by calculating the price of the bonds, which have similar features except coupon rate. She decided to refer back to her finance textbook and dig out some definitions and examples that she could use in her Power Point presentation.
Jill, so we should not have much trouble convincing them of the benefits of investing in bonds remarked John. How should Jill respond? Hence, the rate of return goes up to reduce its price.
She downloaded current data for outstanding bonds of various maturities, rating, and coupon rates see table1 and started preparing her slides. The firm ranked among the very best in terms of the number of successful equity underwriting deals undertaken.
As long as the yields are a true reflection of the risk level of the bond, there would not be any a bargain for the bond price, whether at a discount or premium from face value.
Bonds can be issued at a discount, at par, or even at premium from face value. The existence of a call provision presents a risk to the bond investor that their investment horizon on that bond may be prematurely ended. Your job is to convince them of the relative safety and income potential of corporate bonds" said John.
The ratings of these bonds are determined by two professional bond-rating firms: Why do the coupon rates for the various bonds vary so much?
If the yield exceeds the coupon rate, investors are demanding a higher rate of return than what the company is currently paying via the coupon payment, which leads the price drops and vice versa. To arrive at the price of the bond the coupon payments and the redemption value are discounted at the discount rate.
Among the AA bonds, Telco Utilities has a longer maturity and no sinking fund making it the riskiest. The YTM of a bond is also known as its promised yield.
In the case of callable bonds, investors should calculate the yield to the first call of the bonds to decide. Which one should the investor use when deciding between corporate bonds and other securities of similar risk?
If the coupon rate is lower than the discount rate then the price of the bond would be lower than the face value. What happens when the bond ratings get adjusted downwards? Among the AAA bonds, the zero coupon bond has no call risk, no reinvestment risk, but the higher price risk.
She asks whether the discount bonds are a bargain? Callability makes a bond have a higher reinvestment risk. If the coupon rate is higher than the discount rate then the price of the bond would be higher than the face value.Case Analysis of Corporate Bonds-They are More Complex Than You Think!
Prepared by Quanyi Liu for Professor mi-centre.com in partial fulfillment of the requirements for FIN Financial Management School of Business/Graduate Studies St. Thomas University Miami Gardens, FLa. Term A6/Fall, September 14, %(4).
Bituon, Jan Patrick. BABA 2A Lobaton, Laika Mascrenhas, Katrina Krisha Mercado, Matt Andrew Corporate Bonds – They are More Complex than you Think!
Case Corporate Bonds – They are More Complex Than You Think 1. How should Jill go about explaining the relationship between coupon rates and bond prices? Bond Analysis and Valuation Corporate Bonds-They Are More Complex Than you Think Jill Dougherty was hired as an investment analyst by A.M.
Smith Inc. for the Cincinnati, Ohio office based on her sound academic credentials, which included an MBA from a top ranking university and a CFA designation.
at the time of her recruitment she was told that one of her responsibilities would be to conduct. Bond Analysis and Valuation Corporate Bonds - They Are More Complex Than you Think Jill Dougherty was hired as an investment analyst by A.M.
Smith Inc. for the Cincinnati, Ohio office based on her sound academic credentials. Solution to Case 8. Bond Analysis and Valuation Corporate Bonds −They are More Complex Than You Think! 1. How should Jill go about explaining the relationship between coupon rates and bond prices?5/5(1).Download