The dynamics of bond pricing can often provide trading opportunities for investors that are positioned to take risk. An example would be the pricing of US Steel bonds in 2016. After imported steel tariffs were removed in early 2016, the price of US Steel bonds plunged to reflect the higher credit risk to the company if it were to lose market share to imported steel. We can illustrate many of the concepts in the chapter by analyzing the price movement of the US Steel 7.0% coupon bonds due 2/1/18 as described below.

Describing the bonds

Current Price (2/2/16): $670

Issuer: United States Steel Corporation

Rank: Senior Unsecured

Coupon: 7.00%

Coupon Frequency: Semiannual on Feb. 1 and Aug. 1

Issue Date: 2/1/2008

Maturity Date: 2/1/2018

Callable after 2/1/2013 at $1,050

Bond Ratings:

S&P B

Moodys B2

PLEASE ANSWER: Evaluate the financial condition of US Steel as of the beginning of 2016 from the information that was provided in the table. Reminder that the metrics for calendar years 2016 and 2017 are projected. Identify the weaknesses that support the current B credit rating by Standard & Poors. EXTRA INFO: Free cash flow is defined as Cash Flow from Operating Activities (the top third of the Statement of Cash Flows) less capital expenditures. It measures the cash flow available to return to the companys investors, both bondholders and stockholders. Debt/EBITDA measures how many years EBITDA (a proxy for cash flow) it takes to pay off the debt. The lower the ratio the stronger the financial condition of the company. Mention specific ratio and line items in your analysis.

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