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.

(A)Explain how the gold denominated depositary shares is really a combination of a bond that pays a fixed dollar coupon plus a sequence of gold-forward contracts.

(B)Explain how you can use the gold futures pricing equations to determine the value of the security

(C)Discuss why Freeport would issue a gold-indexed depositary share?

(D)What was the advantage in structuring the depositary shares such that it is back by preferred stock?

Attached file:

6,000,000 Depositary Shares

FREEPORT-McMORAN COPPER & GOLD

Each Representing 0.05 Shares of Gold-Denominated Preferred Stock

Dividends on the Gold-Denominated Preferred Stock will be cumulative from the date of original issuance thereof (the "Issue Date") and are payable quarterly in an amount equal to the Dollar Equivalent Value (as defined herein) of 0.000875 ounces of gold per Depositary Share per quarter. The first quarterly dividend will be payable on November 1, 1993 and will be based upon the number of days the Depositary Shares are outstanding through such date.

The Depositary Shares will be subject to mandatory redemption on August 1, 2003 at the Dollar Equivalent Value of 0.10 ounces of gold per Depositary Share plus accrued and unpaid dividends. Except in limited circumstances, the Depositary Shares will not be subject to redemption at the option of the Company. The Depositary Shares will have a liquidation preference equal to the Dollar Equivalent Value of 0.10 ounces of gold per Depositary Share plus accrued and unpaid dividends. See "Description of Gold Denominated Preferred Stock."

The Depositary Shares have been approved for listing on the New York Stock Exchange under the symbol "FCX Pr B," subject to official notice of issuance.

The Depositary Shares offered by this Prospectus Supplement are offered by the U.S. Underwriters subject to prior sale, to withdrawal, cancellation or modification of the offer without notice, to delivery to and acceptance by the U.S. Underwriters and to certain further conditions. It is expected that delivery of the Depositary Receipts evidencing the Depasitary Shares will be made at the offices of Lehman Brothers Inc. in New York, New York on or about August 12, 1993.