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2 Reuters Corporate Spreads for Industrials 3/28/2014 1 Rating Aaa/AAA 2 Aa1/AA+ Aa2/AA Aa3/AAA1/A+ A2/A A3/ABaa1/BBB+ Baa2/BBB Baa3/BBBBa1/BB+ Ba2/BB Ba3/BBB1/B+ B2/B B3/BCaa/CCC+ US Treasury Yield as % Treasury yield of 3/28/2014 in basis points Treasury yield of 10/2/15 in basis points 1 yr 2 2 yr 3 3 yr 5 5 yr 7 7 yr 10 10 yr 30 30 yr 5 10 14 19 23 24 32 38 47 83 157 231 305 378 452 526 600 0.13 8 18 29 34 39 39 49 61 75 108 182 256 330 404 478 552 626 0.45 12 25 38 43 47 49 59 75 89 122 198 274 350 426 502 578 653 0.93 18 34 50 54 58 61 72 92 107 140 217 295 372 450 527 604 682 1.74 28 42 57 61 65 69 80 103 119 152 232 312 392 472 552 632 712 2.31 42 54 65 69 72 77 89 115 132 165 248 330 413 495 578 660 743 2.73 65 77 89 92 95 103 117 151 170 204 286 367 449 530 612 693 775 3.55 13 45 93 174 231 273 355 23.7 58.5 84.9 129.9 168.3 199.4 282.6 Treasury yield of 10/9/15 in basis points will input these data on 10/11/15 FYI, 1 month bill = -1.5BP, 3 mo = 0.8BP & 6 mon = 6.6BP 3 Bond rating for Ford from www.standardandpoors.com Maturity Coupon Face Value 10 12% $50,000,000 3 Rating Year Treasury Rates get this from www.standardandpoors.com 1 2 3 5 7 0.13 0.45 0.93 1.74 2.31 Spread in bp Spread in % 4a remember to use semi-annual coupon bond price expressed as a percent of par value 6 look at the spread if can get a better bond rating Spread in bp Spread in % Yield to maturity periodic yield Price YTM 7 Increase in Cash from Issue everything below here is to be done in class part 8 is not to be turned in, but to be done in the synchronous session 8 if the bond is selling at $65,000,000 what is the YTM? if the bond were callable in 7 years at a price of 120% of par value, calculate the Yield to Call now value the bond if it were a 7 year bond; 8% coupon now let us find the coupon rate on a bond Yield to maturity 6% Maturity 10 years Price $900 $1000 face value of bond 2.73 these are 3/28/14 yield; we will update with 10/9/15 yields in class pick the appropriate spread for Ford's rating Yield to maturity periodic yield Bond price (PV of 12% coupon discounted at 10 yr yield; remember semi-annual coupons) 5 10 Solve for coupon rate coupon payment coupon rate = (PMT * 2)/FV Value the bond with Treasury yields of Oct 9, 2015 mon = 6.6BP elds in class #1 Yield Curve 3 mo 6 mo 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 20 yr 30 yr Resource Center 0.01 0.07 0.09 0.13 0.39 0.76 1.72 2.41 3 3.68 3.92 01/02/14 01/03/14 0.02 0.07 0.1 0.13 0.41 0.8 1.73 2.42 3.01 3.69 3.93 01/06/14 0.01 0.05 0.08 0.12 0.4 0.78 1.7 2.38 2.98 3.66 3.9 01/07/14 0.01 0.04 0.08 0.13 0.4 0.8 1.69 2.37 2.96 3.64 3.88 01/08/14 0 0.05 0.08 0.13 0.43 0.87 1.77 2.44 3.01 3.67 3.9 01/09/14 0.01 0.04 0.06 0.13 0.44 0.86 1.75 2.41 2.97 3.62 3.88 01/10/14 0.01 0.05 0.06 0.12 0.39 0.77 1.64 2.29 2.88 3.54 3.8 01/13/14 0 0.03 0.06 0.11 0.39 0.74 1.6 2.25 2.84 3.52 3.77 01/14/14 0 0.04 0.06 0.11 0.39 0.78 1.65 2.3 2.88 3.54 3.8 01/15/14 0.01 0.04 0.06 0.13 0.41 0.81 1.68 2.33 2.9 3.55 3.81 01/16/14 0.01 0.04 0.07 0.11 0.41 0.8 1.66 2.3 2.86 3.52 3.77 01/17/14 0.01 0.05 0.07 0.11 0.4 0.79 1.64 2.27 2.84 3.5 3.75 01/21/14 0.01 0.04 0.07 0.12 0.4 0.81 1.67 2.29 2.85 3.5 3.74 01/22/14 0 0.04 0.07 0.11 0.44 0.85 1.72 2.34 2.87 3.52 3.75 01/23/14 0.01 0.04 0.05 0.11 0.39 0.77 1.62 2.24 2.79 3.44 3.68 01/24/14 0.04 0.04 0.06 0.11 0.37 0.75 1.58 2.2 2.75 3.4 3.64 01/27/14 0.04 0.05 0.07 0.11 0.37 0.76 1.61 2.24 2.78 3.43 3.67 01/28/14 0.05 0.05 0.07 0.11 0.38 0.75 1.59 2.22 2.77 3.43 3.68 01/29/14 0.04 0.04 0.07 0.11 0.36 0.71 1.52 2.15 2.69 3.36 3.62 01/30/14 0.04 0.02 0.06 0.1 0.36 0.72 1.55 2.19 2.72 3.4 3.65 Date 1 mo 3 mo 6 mo 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 20 yr 30 yr 10/2/2015 -0.015 0.008 0.066 0.237 0.585 0.849 1.299 1.683 1.994 2.41 2.826 10/9/2015 Sector Metals and Mining High Grade: AAA thr Sector Metals and Mining High Grade: AAA thr High Yield: BBB thro Emerging Markets Convertibles US Treasury Yield Baa1/BBB+ Baa2/BBB Baa3/BBBBa1/BB+ Ba2/BB Ba3/BBB1/B+ B2/B B3/BCaa/CCC Securitie Volume% Buys Sells% Inter yr % 2 5 yr 10 yr 30 yr Traded ($ millions) Spread Spread Spread Spread 2287 515 27% 35% 39% 1206 282 20% 43% 37% 105 240 202 298 Securitie Volume% Buys Sells% Inter yr % 2 5 yr 10 yr 30 yr Traded ($ millions) Spread Spread Spread Spread 2287 515 27% 35% 39% 1206 282 20% 43% 37% 105 240 202 298 863 191 35% 24% 41% 299 582 318 338 144 12 33% 28% 40% 444 358 74 31 42% 32% 26% 0.32 1.46 2.6 3.55 38 47 83 157 231 305 378 452 526 600 0.13 61 75 108 182 256 330 404 478 552 626 0.45 75 89 122 198 274 350 426 502 578 653 0.93 92 107 140 217 295 372 450 527 604 682 1.74 103 119 152 232 312 392 472 552 632 712 2.31 115 132 165 248 330 413 495 578 660 743 2.73 151 170 204 286 367 449 530 612 693 775 3.55 yields for different bond ratings expressed in percentage maturity 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 30 yr Treasury 3/28/14 0.13 0.45 0.93 1.74 2.31 2.73 3.55 AAA 0.18 ### 0.93 1.74 2.31 ### ### AA 0.27 3.27 0.93 1.74 2.31 3.78 5.95 A 0.37 0.76 0.93 1.74 2.31 ### ### BBB 0.60 1.20 1.82 2.81 3.50 4.05 5.25 BB 2.44 3.01 3.67 4.69 5.43 6.03 7.22 B 4.65 5.23 5.95 7.01 7.83 8.51 9.67 CCC 6.13 6.71 7.46 8.56 9.43 10.16 11.30 Bond yields based on 3/28/14 spreads & treasury yields 12 10 8 Treasury 10/9/2105 6 yields for different bond ratings expressed in percentage, based on 3/28/2014 spreads & treasury rates rating treas AAA AA A BBB BB B C 1 yr 0.13 0.18 0.27 0.37 0.60 2.44 4.65 6.13 4 2 yr 0.45 0.53 0.74 0.84 1.20 3.01 5.23 6.71 3 yr 0.93 1.05 1.31 1.42 1.82 3.67 5.95 7.46 5 yr 1.74 1.92 2.24 2.35 2.81 4.69 7.01 8.56 2 7 yr 2.31 2.59 2.88 3.00 3.50 5.43 7.83 9.43 10 yr 2.73 3.15 3.38 3.50 4.05 6.03 8.51 10.16 30 yr 3.55 4.20 4.44 4.58 5.25 7.22 9.67 11.30 0 1 yr 2 yr 3 yr treas BBB 5 yr AAA BB 7 yr AA B 10 yr A C 30 yr You are an intern with Ford Motor Company in its corporate finance division. The firm is planning to issue $50 million of 12% annual coupon bonds with a 10-year maturity. The firm anticipates an increase in its bond rating. Your boss wants you to determine the gain in the proceeds of the new issue if the issue is rated above the firm's current bond rating. To prepare this information, you will have to determine Ford's (ticker symbol F) current debt rating and the yield curve for their particular rating. 1. Begin by finding the current U.S. Treasury yield curve. I will give you the Treasury data; so you do not need to find it. 2. Find the current yield spreads for the various bond ratings. Unfortunately, the current spreads are available only for a fee, so we will use old ones from March 28, 2014. I have gone to BondsOnline (www.bondsonline.com) and clicked \"Today's Market.\" Next, I clicked \"Corporate Bond Spreads.\" I have downloaded this table to Excel and copied it both below and to the excel spread sheet that I have given you. (We will work this problem with the spreads as of 3/28/14.) 3. Find the current bond rating for Ford. Go to Standard & Poor's 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 (it's free). Next, you will be able to search by Organization Nameenter Ford Motor Company (ticker symbol F). Use the credit rating for the organization, not the specific issue ratings. This you will need to do. When I looked, there were ST and LT (use LT in local currency). (The rating that I found was for a LT bond issued September 6, 2013.) If you cannot find the rating, send your professor an email so that she/he can give it to you. 4. Return to Excel and create a timeline with the discount rates you will need to value the new bond issue. a. To create the required rate for Ford's issue, add the appropriate spread to the Treasury yield of the same maturity (i.e., ten years). However, note that the spread is in basis points, which are 1/100th of a percentage point. (So you must multiply each of the spread numbers by .01 to add them to the Treasury rates which are in row 22 of the excel spread sheet (and the last line of the table in this exercise). 5. Compute the issue price of the bond, assuming that the bond is issued with semi-annual coupons (using as its initial yield to maturity the rate that you calculated for the ten-year corporate bond). You will be calculating the cash proceeds that could be raised from the issue. 6. Repeat steps 4 and 5 based on the assumption that Ford 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. 7. Compute the additional cash proceeds that could be raised from the issue if the rating were improved. 8. In class we will look at valuing the bond if it were issued with different coupon rates and different maturities (using the data from the excel table). We will also calculate yield to maturity, yield to call and coupon payment in class. We also will look at the current Treasury yield curve and obtain what would be the rate on a ten-year Ford bond, using the spreads of March 28, 2014, but the yields as of Friday, October 9 (the Friday close before our class). Go to http://online.wsj.com/mdc/public/page/mdc_bonds.html over the weekend to obtain the yield on the ten-year Treasury. Please bring this excel spread sheet to class and have your computer open to excel during our synchronous session. Reuters Corporate Spreads for Industrials 3/28/2014 1 Rating 1 yr Aaa/AAA 5 Aa1/AA+ 10 Aa2/AA 14 Aa3/AA19 A1/A+ 23 A2/A 24 A3/A32 Baa1/BBB+ 38 Baa2/BBB 47 Baa3/BBB83 Ba1/BB+ 157 Ba2/BB 231 Ba3/BB305 B1/B+ 378 B2/B 452 B3/B526 Caa/CCC+ 600 US Treasury Yield 0.13 2 2 yr 8 18 29 34 39 39 49 61 75 108 182 256 330 404 478 552 626 0.45 3 4 3 yr 12 25 38 43 47 49 59 75 89 122 198 274 350 426 502 578 653 0.93 5 6 5 yr 18 34 50 54 58 61 72 92 107 140 217 295 372 450 527 604 682 1.74 7 8 7 yr 28 42 57 61 65 69 80 103 119 152 232 312 392 472 552 632 712 2.31 9 10 10 yr 42 54 65 69 72 77 89 115 132 165 248 330 413 495 578 660 743 2.74 30 30 yr 65 77 89 92 95 103 117 151 170 204 286 367 449 530 612 693 775 3.55