Fi 473 Case

FI 473 Case

Tombstones

by:           Jiayi Xu

Yunfeng Yang

Liangxuan Ye

Chuansu Tan

Mengyue Xu

MSFT Case

a)  Why is MSFT raising money?

   During the financial crisis, the company’s net income dropped dramatically. So, in order to

continue playing in the game, the MFST needed to raise money to fund their operation.

b) Is this paper really cheap? What is YTM for each issue?

2013 YTM=0.931% (=2*RATE(6,0.875%/2*1000,-998.35,1000)

2015 YTM=1.717%

2020 YTM=3.101%

2040 YTM=4.567%

These papers are cheap because they were sold in discount.

c) Why YTM differs from coupon rate? What should we compare YTM with?

 YTM is different from coupon rate because the selling price is different from the principle value.

The YTM should be compared with the T-bill’s YTM coordinately. For example, a 3 year MFST

senior unsecured bond should be compared with a 3 year Treasury bond.

d) Why did MSFT issue four papers instead of one?

 In order to maximize the fund that it can raise, the MFST needs to have multiple types of bond

to meet different investor’s goals.

e) Do you expect that those notes will be called or redeemed?

   If the bonds were embedded call options, the issuer can call back the bonds when the interest

rate decreases or the credit quality of the bond has increased. Given the contest that these bonds

were issued in 2010, I do not expect the company would recall the bonds because the economy

was expected to get better which means the interest rate won’t go anywhere lower.

Coca-Cola

a) What is YTM for CCE issue?

  The yield to maturity for Coca Cola Enterprise in 2012 notes is 3.82%. The yield to maturity

in 2015 notes is 3.9%.

I calculated YTM by using initial public offering price rate 99.812% multiple by $1000 as present value. Then we pay interest twice a year so N is 6. Future value is $1000. Coupon payment is $18.75. so we can get semi rate is 1.91% and we just multiple by 2 equal to 3.82% which is yield to maturity for 2012.

b). What are the differences w.r.t. MSFT note above?

  MSFT has a great divergence through its yield to maturity. The yield to maturity changed from 0.931% in 2013 to 4.567% in 2040, while yield of maturity ranges from 3.82% to 3.9% of CCE notes. The CCE notes don’t have a lot differences for its yield to maturity. And there are two notes issued while MSFT issued four notes.

c). What is default risk for CCE note?

  Default risk premium is what we got former CCE note. We assume that risk-free rate is 2% constantly. The default risk premium for the 2012 note is 3.82%- 2%= 1.82%. the default risk premium for 2015 note is 3.9%- 2% =1.9%.

d). Why is CCE raising funds?

 The reason for Coca Cola Enterprise raising funds is to pay down their debt.

Norfolk Southern Century Bond:

a)Why did NSC “reopen” this issue to raise another $250M?

They reopened the issue to sell an additional $250million because the market observes they were pay around.They estimated that Norfolk Southern was paying about 0.75% more on its century bond then they can pay if the similar 30-year bond been re-issued.

b)  Do you think NSC is going to be around in 2105? Does this matter?

Through the case , there is no clue showing the NSC is going to be around in 2015. It is hard to tell.

It does matter, because if they are not around in 2105, the company might lose money on this bond and  default.

c)Who buys those century bonds?

The century bonds attracts lots of organizations like banks or insurance companies, because the investment banks and the U.S treasury are all moving toward a long-term debt. Those companies which need to match their long-duration liabilities with a long-term income stream.