Corporate Bonds: They Are More Complex Than You Think:

When John Sullivan was hired as chief investment strategist at New York-based AM Smith Inc., he had indicated that one of his main goals would be to significantly expand the fixed income unit of the company's overall investment portfolio, A., M. Smith, Incorporated, a well-known investment services firm, had branches in 28 major metropolitan cities in the United States, as well as some overseas branches in the United Kingdom, Canada, Singapore, and Australia. The size and performance of its equity portfolio ranked it in the top 10% of all investment companies worldwide, due to its excellent client relations, research staff, and customer service. However, with the recent and prolonged fall in interest rates, a steady increase in fixed income underwriting appearances seemed to hover on the company's radar. | John realized that the firm's client base, while fairly knowledgeable about stock investing, would need to be adequately informed, trained and educated on the finer nuances of fixed income investing if it was to have any chance of achieving success. its objective. So he hired Jill Dougherty, who had worked for a bond trading firm for nearly 10 years before returning to Wharton full-time to earn her MBA degree last year. He also managed to pick up the CFA design from her along the way. John told Jill that his first major assignment would be to conduct educational seminars/workshops for current and prospective clients on the basics and advanced aspects of fixed income investing. With approximately 75% of our clients in the 55+ age group, Jill should have no problem enrolling these individuals in these workshops and convincing them of the stability and earning potential associated with investing in corporate bonds. John emphasized, as he thumbed through the spreadsheet containing the contact information of the company's wealthiest investors, "However, I would have to indoctrinate them about the various terms and features associated with these bonds, such as yield to maturity, redemption, convertibility, duration, convexity, and the like, he added. With the $55 million utility bond deal hanging in the balance, any help we can provide our best clients in understanding the relative investment merits of this deal will no doubt go a long way toward generating a ton of – rental business. set for the signature, don't you think?” John asked. Bet! "Jill, as she was contemplating John's statements," she replied, "I'll get right to work on these shops, John." . , motivated and interested in learning more about the opportunities offered by investing in bonds. Jill knew that she would have a good turnout at the seminar. In her PowerPoint presentation, she downloaded current data on bonds outstanding of various maturities, ratings, and coupon rates (see Table 1). Any help we can give our best clients to understand the relative investment merits of this deal will certainly go a long way in generating a ton of – fixed income business for the firm, don't you think?” John asked. Bet! "Jill, as she was contemplating John's statements," she replied, "I'll get right to work on these shops, John." . , motivated and interested in learning more about the opportunities offered by investing in bonds. Jill knew that she would have a good turnout at the seminar. In her PowerPoint presentation, she downloaded current data on bonds outstanding of various maturities, ratings, and coupon rates (see Table 1). Any help we can give our best clients to understand the relative investment merits of this deal will certainly go a long way in generating a ton of – fixed income business for the firm, don't you think?” John asked. Bet! "Jill, as she was contemplating John's statements," she replied, "I'll get right to work on these shops, John." . , motivated and interested in learning more about the opportunities offered by investing in bonds. Jill knew that she would have a good turnout at the seminar. In her PowerPoint presentation, she downloaded current data on bonds outstanding of various maturities, ratings, and coupon rates (see Table 1). Don't you think so?” John asked. Bet! "Jill, as she was contemplating John's statements," she replied, "I'll get right to work on these shops, John." . , motivated and interested in learning more about the opportunities offered by investing in bonds. Jill knew that she would have a good turnout at the seminar. In her PowerPoint presentation, she downloaded current data on bonds outstanding of various maturities, ratings, and coupon rates (see Table 1). Don't you think so?” John asked. Bet! "Jill, as she was contemplating John's statements," she replied, "I'll get right to work on these shops, John." . , motivated and interested in learning more about the opportunities offered by investing in bonds. Jill knew that she would have a good turnout at the seminar. In her PowerPoint presentation, she downloaded current data on bonds outstanding of various maturities, ratings, and coupon rates (see Table 1).

Editor	Valor nominal	coupon rate	Classification	Quoted price
abc energy	$1,000	6%	AAA	$809.10
abc energy	$1,000	0%	AAA	$211.64
trans power	$1,000	10%	AA	$1025.00
Public telecommunications services	$1,000	12%	AA	$1300.00

1. Why is there so much variation in the coupon rates and prices of these various bonds?" asks one of Jill's wealthiest clients. How should Jill respond?

2. "How are corporate bond ratings determined?" another customer asks, "And how and why do these ratings change once you arrive at them?" What should Jill say?

3. During the presentation, a client is confused about the fact that some of these bonds are selling for less than face value, while others are selling at a premium. She asks if the cheaper bonds are a bargain. How should Jill go about clearing up her confusion?

4. During the survey stage, most of the company's clients had no idea about YTM. Using the example of the bonds listed in Table 1, explain what this term means and how it can be calculated.

5. During the slideshow, Jill often referred to a corporate bond's coupon rate and its yield per value, which confused some clients about the definition and interpretation of each term. How should Jane explain the difference between the coupon rate and the yield to maturity for each of those listed in Table 1? Which one should the investor use when deciding between corporate securities and others of similar risk? Please explain.

6. How should Jill go about explaining the risk of each bond?