Corporate Yield Curves You are an intern with Enel Generacion Chile, the largest electric utility company in Chile, in their corporate finance division. The firm is planning to issue $100 million of 7.875% annual coupon bonds with a 10-year maturity in the United States. The firm anticipates an increase in its bond rating. Your immediate superior wants you to determine the gain in the proceeds of the new issue if the issue is rated above the firms current bond rating. To prepare the necessary information, you will need to determine Enel Generacion Chiles current debt rating and the yield curve of their particular rating. 1. You begin by finding the current U.S. Treasury yield curve. At the Treasury Web site (www.treas .gov), search using the term yield curve and select Daily Treasury Yield Curve Rates. Choose time period. Highlight the entire data table including the headers, copy and paste it into Excel. Remember to use Match Destination Formatting (M) as the paste option. 2. The current yield spreads for the various bond ratings are shown below. page 238 fifth edition Copy the table above and paste it to the same file as the Treasury yields from previous step. 3. Find the current bond rating for Enel Generacion Chile. Go to Standard & Poors Web site (www. standardandpoors.com), select Find a Rating from the list at the left of the page, then select Credit Ratings Search. At this point, you will have to register (its free) or enter a username and password provided by your instructor. Next, you will be able to search by organization name enter Enel Generacion Chile and select accordingly. Use the credit rating of the organization, not the specific issue ratings. 4. Return to Excel and create a time with the cash flows and discount rates you will need to value the new bond issue. a. To create the required spot rates for the Enel Generacion Chile issue, add the appropriate spread to the Treasury yield of the same maturity. b. The yield curve and spread rates you have found do not cover every year that you will need for the new bonds. Fill in these by linearly interpolating the given yields and spreads. For example, the four-year spot rate and spread will be the average of the three- and five-year rates. c. To compute the spot rates for Enel Generacion Chiles current debt rating, add the yield spread to the Treasury rate for each maturity. However, note that the spread is in basis points, which are 1/100th of a percentage point. d. Compute the cash flows that would be paid to bondholders each year and add them to the timeline. 5. Use the spot rates to calculate the present value of each cash flow paid to the bondholders. 6. Compare the issue price of the bond and its initial yield to maturity. 7. Repeat Steps 46 based on the assumption that Enel Generacion Chile is able to raise its bond rating by one level. Compute the new yield based on the higher rating and the new bond price that would result. 8. Compute the additional cash proceeds that could be raised from the issue if the rating were improved.