Hybrid Bonds: Gold-Indexed Securities

Attached are extracts from the first page of the prospectus for Gold-Denominated Depositary shares sold by Freeport McMoran Copper and Gold (FCX). The depositary shares have features that are very much like a bond in that they have fixed payment and a maturity. The depositary shares are backed by FCX preferred stock that pays a gold-dividend and held in trust with Mellon Bank. The gold indexed depositary shares paid a gold-dividend of 0.000875 ounces of gold every quarter for a fixed period of 10-years. In addition, the depositary shares paid a face value of 0.1 ounces of gold at the end of the 10-year period. Each depositary share has an initial value of 0.1 ounces of gold.

1. Explain how you can use the gold futures pricing equations to determine the value of the security

2. Discuss why Freeport would issue a gold-indexed depositary share?

3. What was the advantage in structuring the depositary shares such that it is back by preferred stock?