John's statements, "I'll get right to work on these workshops, John. You and I both know that these corporate bond investments are more complex than you think!" Jill immediately started preparing for the fixed-income investing workshops by surveying a sample of the firm's best clients regarding their grasp of key bond terms, features, and characteristics. She was surprised to learn how little these successful clients knew about the technical aspects of fixed-income investing, and how eager, motivated, and interested they were to know more about the opportunities offered by bond investing. Jill knew that she would have a good turnout at the seminar. She referred back to her investment analysis textbook to dig out some definitions and examples that she could use in her PowerPoint presentation. She downloaded current data for outstanding bonds of various maturities, ratings, and coupon rates (see Table 1) and started preparing her slides. 36 Case 9 Corporate Bonds-They Are More Complex than You Think "With about 75% of our clients being in the 55+ age group, Jill, you should have no problem in signing these folks up for these workshops, and convincing them about the stability and earnings potential associated with corporate bond investing," stressed John, as he browsed through the spreadsheet containing the contact information of the firm's wealthiest investors. "You would, however, have to indoctrinate them about the various terms and features associated with these bonds, such as yield to maturity, call provisions, convertibility, duration, convexity, and the like," he added. "With the $55-million utility bond deal hanging in the balance, any help we can give our best clients in understanding the relative investment merits of this deal will surely go a long way in generating a ton of fixed-income business for the firm, don't you think?" queried John. "You bet!" replied Jill, as she contemplated John's statements, "I'll get right to work on these workshops, John. You and I both know that these corporate bond investments are more complex than you think!" Jill immediately started preparing for the fixed-income investing workshops by surveying a sample of the firm's best clients regarding their grasp of key bond terms, features, and characteristics. She was surprised to learn how little these successful clients knew about the technical aspects of fixed-income investing, and how eager, motivated, and interested they were to know more about the opportunities offered by bond investing. Jill knew that she would have a good turnout at the seminar. She referred back to her investment analysis textbook to dig out some definitions and examples that she could use in her PowerPoint presentation. She downloaded current data for outstanding bonds of various maturities, ratings, and coupon rates (see Table 1) and started preparing her slides. Corporate Bonds-They Are More Complex than You Think When John Sullivan was hired as chief investment strategist at the New York headquarters of A. M. Smith Inc., he had indicated that one of his main goals would be to significantly expand the fixed-income unit of the firm's overall investment portfolio. A. M. Smith, Incorporated, a prestigious investment services firm, had branches in 28 major metropolitan cities across the United States, as well as a few 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, largely due to its excellent customer relations, research staff and client support services. However, with the recent, prolonged drop in interest rates, a constant surge in fixed-income underwriting deals seemed to be circling around the firm's radar. John realized that the firm's client base, although pretty knowledgeable about equity investing, would need to be adequately informed, trained, and educated about the finer nuances of fixed-income investing if he stood any chance of attaining his goal. So, he hired Jill Dougherty, who had worked for a bond trading firm for almost 10 years, prior to going back to Wharton full-time to earn her MBA degree this past year. She also managed to pick up her CFA designation along the way. John told Jill that her first major assignment would be to conduct educational seminars/workshops for current and prospective clients regarding the basic and advanced aspects of fixed income investing. 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?" asks another client, "And how and why do these ratings change once they are arrived at?" What should Jill say? 3. During the presentation, one client is confused about the fact that some of these bonds sell for less than their face value, while others sell at a premium. She asks whether the cheaper bonds are a bargain. How should Jill go about clearing up her confusion? 4. During the survey stage, a majority of the firm's clients had no idea about yield to maturity. Using the example of the bonds listed in Table 1, explain what this term means and how one can go about calculating it. 5. During the slideshow, Jill often made reference to a corporate bond's nominal yield and its effective yield, confusing some clients about the definition and interpretation of each term. How should Jane explain the difference between nominal and effective yield to maturity for each bond listed in Table 1 ? Which one should the investor use when deciding between corporate bonds and other securities of similar risk? Please explain. 6. Jill knows that the call period and its implications will be of particular concern to the audience. How should she go about explaining the effects of the call provision on bond risk and bonds are a bargain. How should Jill go about clearing up her confusion? 4. During the survey stage, a majority of the firm's clients had no idea about yield to maturity. Using the example of the bonds listed in Table 1, explain what this term means and how one can go about calculating it. 5. During the slideshow, Jill often made reference to a corporate bond's nominal yield and its effective yield, confusing some clients about the definition and interpretation of each term. How should Jane explain the difference between nominal and effective yield to maturity for each bond listed in Table 1? Which one should the investor use when deciding between corporate bonds and other securities of similar risk? Please explain. 6. Jill knows that the call period and its implications will be of particular concern to the audience. How should she go about explaining the effects of the call provision on bond risk and return potential? 7. How should Jill go about explaining the riskiness of each bond? Rank the bonds in terms of their relative riskiness. 8. One of Jill's best clients poses the following question: "If I buy 10 of each of these bonds, reinvest any coupons received at the rate of 6% per year, and hold them until they mature, what will my realized return be on each bond investment?" How should Jill go about demonstrating the solution to this question? John's statements, "I'll get right to work on these workshops, John. You and I both know that these corporate bond investments are more complex than you think!" Jill immediately started preparing for the fixed-income investing workshops by surveying a sample of the firm's best clients regarding their grasp of key bond terms, features, and characteristics. She was surprised to learn how little these successful clients knew about the technical aspects of fixed-income investing, and how eager, motivated, and interested they were to know more about the opportunities offered by bond investing. Jill knew that she would have a good turnout at the seminar. She referred back to her investment analysis textbook to dig out some definitions and examples that she could use in her PowerPoint presentation. She downloaded current data for outstanding bonds of various maturities, ratings, and coupon rates (see Table 1) and started preparing her slides. 36 Case 9 Corporate Bonds-They Are More Complex than You Think "With about 75% of our clients being in the 55+ age group, Jill, you should have no problem in signing these folks up for these workshops, and convincing them about the stability and earnings potential associated with corporate bond investing," stressed John, as he browsed through the spreadsheet containing the contact information of the firm's wealthiest investors. "You would, however, have to indoctrinate them about the various terms and features associated with these bonds, such as yield to maturity, call provisions, convertibility, duration, convexity, and the like," he added. "With the $55-million utility bond deal hanging in the balance, any help we can give our best clients in understanding the relative investment merits of this deal will surely go a long way in generating a ton of fixed-income business for the firm, don't you think?" queried John. "You bet!" replied Jill, as she contemplated John's statements, "I'll get right to work on these workshops, John. You and I both know that these corporate bond investments are more complex than you think!" Jill immediately started preparing for the fixed-income investing workshops by surveying a sample of the firm's best clients regarding their grasp of key bond terms, features, and characteristics. She was surprised to learn how little these successful clients knew about the technical aspects of fixed-income investing, and how eager, motivated, and interested they were to know more about the opportunities offered by bond investing. Jill knew that she would have a good turnout at the seminar. She referred back to her investment analysis textbook to dig out some definitions and examples that she could use in her PowerPoint presentation. She downloaded current data for outstanding bonds of various maturities, ratings, and coupon rates (see Table 1) and started preparing her slides. Corporate Bonds-They Are More Complex than You Think When John Sullivan was hired as chief investment strategist at the New York headquarters of A. M. Smith Inc., he had indicated that one of his main goals would be to significantly expand the fixed-income unit of the firm's overall investment portfolio. A. M. Smith, Incorporated, a prestigious investment services firm, had branches in 28 major metropolitan cities across the United States, as well as a few 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, largely due to its excellent customer relations, research staff and client support services. However, with the recent, prolonged drop in interest rates, a constant surge in fixed-income underwriting deals seemed to be circling around the firm's radar. John realized that the firm's client base, although pretty knowledgeable about equity investing, would need to be adequately informed, trained, and educated about the finer nuances of fixed-income investing if he stood any chance of attaining his goal. So, he hired Jill Dougherty, who had worked for a bond trading firm for almost 10 years, prior to going back to Wharton full-time to earn her MBA degree this past year. She also managed to pick up her CFA designation along the way. John told Jill that her first major assignment would be to conduct educational seminars/workshops for current and prospective clients regarding the basic and advanced aspects of fixed income investing. 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?" asks another client, "And how and why do these ratings change once they are arrived at?" What should Jill say? 3. During the presentation, one client is confused about the fact that some of these bonds sell for less than their face value, while others sell at a premium. She asks whether the cheaper bonds are a bargain. How should Jill go about clearing up her confusion? 4. During the survey stage, a majority of the firm's clients had no idea about yield to maturity. Using the example of the bonds listed in Table 1, explain what this term means and how one can go about calculating it. 5. During the slideshow, Jill often made reference to a corporate bond's nominal yield and its effective yield, confusing some clients about the definition and interpretation of each term. How should Jane explain the difference between nominal and effective yield to maturity for each bond listed in Table 1 ? Which one should the investor use when deciding between corporate bonds and other securities of similar risk? Please explain. 6. Jill knows that the call period and its implications will be of particular concern to the audience. How should she go about explaining the effects of the call provision on bond risk and bonds are a bargain. How should Jill go about clearing up her confusion? 4. During the survey stage, a majority of the firm's clients had no idea about yield to maturity. Using the example of the bonds listed in Table 1, explain what this term means and how one can go about calculating it. 5. During the slideshow, Jill often made reference to a corporate bond's nominal yield and its effective yield, confusing some clients about the definition and interpretation of each term. How should Jane explain the difference between nominal and effective yield to maturity for each bond listed in Table 1? Which one should the investor use when deciding between corporate bonds and other securities of similar risk? Please explain. 6. Jill knows that the call period and its implications will be of particular concern to the audience. How should she go about explaining the effects of the call provision on bond risk and return potential? 7. How should Jill go about explaining the riskiness of each bond? Rank the bonds in terms of their relative riskiness. 8. One of Jill's best clients poses the following question: "If I buy 10 of each of these bonds, reinvest any coupons received at the rate of 6% per year, and hold them until they mature, what will my realized return be on each bond investment?" How should Jill go about demonstrating the solution to this