General Gas Ltd., a natural gas pipeline company, has contacted

your office for advice on an upcoming bond issue.

You work for an investments services firm and your specialization

is in fixed income, helping companies to finance

and to refinance with bonds. The company s CFO provided

some preliminary information, and the issue is going to be

impressive. At $500 million, it will take some time and effort

to raise the funds. Details of the issue are listed below.

Number of bonds: 50,000

Face value: $10,000

Coupon rate: 4.5%

Frequency: semiannual

Initial price: par value

Settlement: January 1, 2016

Maturity: December 31, 2034

News of the upcoming issue has gotten out quickly, and

you ve already received calls from interested investors. One

firm in particular has expressed a desire to invest $50 million

as soon as the bonds are available, and other firms have

demonstrated that they too will make significant investments.

In anticipation, your supervisor has asked you to

calculate several values.

An Interesting Rate Discussion

Prior to the bond s issue you meet with Deb Enshire, a longterm

client that would like to learn more about General

Gas s upcoming borrowing. Deb is seventy years old and

very wealthy, having inherited $20 million when she was

only thirty. Deb is risk averse in many ways, and this guided

her investment decisions in 1975 when she inherited her

wealthshe took almost all of the money and invested in

longterm bonds. Since then her bond portfolio has performed

well and she has had several years where her returns

were greater than 10 percent. You tell her that General Gas, a

tripleB rated firm, is about to offer 19year semiannual pay

bonds with an annual coupon of 4.5 percent. Deb scoffs. She

thinks that the current bond rate environment is ridiculously

low and that her bond strategy is no longer

appropriate.

4. By comparing current low rates (which are well below

10 percent) to her years of doubledigit bond returns,

what is Deb failing to consider?

5. Further to your answer in question 4 above, what are

the potential implications for Deb s portfolio?

6. Deb does a lot of reading, and during your meetings

with her she occasionally goes off on a tangent based on

what she has been reading. Today s meeting is no exception

and she has asked you to explain the significance of

interest rate parity if she were to invest in a bond similar

to General Gas s, but with a U.S. company.