1. You need to select a Corporate Bond that is a Good Faith and Credit Instrument....
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
1. You need to select a Corporate Bond that is a Good Faith and Credit Instrument. This corporate bond should: a. Not be a Senior bond b. No pledge of any assets to back the bond you select c. No foreign corporate bonds (thus, no need to evaluate foreign exchange risk) d. The designation of the corporate bond being a Debenture or Note is the best indicator that you are selecting the correct type of bond. 2. Not all firms have issued Corporate Bonds - If you are interested in a particular firm, but it has no Corporate Bonds outstanding, select another company in the same industry that does have a corporate bond outstanding. Your evaluation of this alternative firm and the industry can be of use in later assignments. 3. It is probably best to select an S&P 500 firm, but this is not required. Lots of these firms will have multiple bonds outstanding that will qualify for this assignment. 4. The bond that you select must have at least a two year maturity remaining, thus at least 24 months are remaining in its life. 5. The bond that you select should have been issued at least 5 years ago (2013), although there is some flexibility here for your selection. 6. The bond rating is important in the evaluation process for this assignment but you can select either an Investment Grade or a Speculative Grade (Junk Bond) bond. A. B. GENERAL BOND AND INVESTOR INFORMATION What I'm looking for Briefly discuss the general characteristics of the bond touching on: 1. 1. a. b. 2. A brief discussion of why you selected this bond to analyze, emphasizing how your investment objectives and/or your business interests have resulted in this selection. EVALUATION OF THE CORPORATE BOND'S UNSYSTEMATIC RISK Corporation's Ability to Repay Principal - This entails the identification or calculation of key financial ratios for both their current financial data and historical values. a. b. Finacial and nowmrative. C. A brief description of the company that issued the bond. A brief description of the bond issue; such as the original life of the bond, life remaining, coupon rate, if the bond is callable, current rating, current yield, etc. Identify these key ratios based on our text and lecture. (NOTE: These can be selected, in certain instances it might be necessary to calculate the financial ratio based on financial data provided in financial statements in the database, from the Standard & Poor's - Net Advantage and MORNINGSTAR in the ALADIN databases, you might find the company reports in Value Line useful, this is also in the ALADIN databases..) (Note: You might also find useful the key financial statements and financial ratios that are available on the Internet at Yahoo's web site, http://finance.yahoo.com/) Compare these results to industry standards available from published sources or preferably compare to the industry leader (sales/revenue) [or number two (sales/revenue) in the industry if you are analyzing the industry leader] based on financial ratios from the ALADIN databases, et. al. In addition, include an evaluation of the company's ratios, from B.1.a, over time, what is commonly referred to as trend analysis. C. 3. 1. 2. 2. Credit Position of the Company Discuss the debt-paying experience of the company. (Use the information about this company's current and historic bond ratings.) Has the company ever defaulted? What is the character of the issuing corporation? a. Corporation's Ability to Pay Interest - Same procedure as in 1 above. Note: As per our class discussion, Standard & Poor's Bond Guide, (both hard copy and in their database) provides information about an interest coverage ratio, and calculates this value over several years. b. C. EVALUATION OF THE CORPORATE BOND'S INVESTMENT RETURN AND SYSTEMATIC RISK Determine the Yield-To-Maturity (YTM) based on quarterly periods (March, June, September, December) for the past nineteen periods. (March 2013 through September 2017). [If September 2017 is not available, use data through June 2017.] Look-up Bond Yield Averages for the corresponding nineteen quarterly periods (available in either Standard & Poor's Bond Guide or MERGENT's Bond Record as per handout example) by the same bond rating classification. (Note: These publications are in the Marymount University Ballston Library.) 3. دیا Utilizing EXCEL, (this is also available at our Computer Lab) complete the following statistical analysis: (Note: The best and most succinct discussion on using and interpreting EXCEL is the statistics text STATISTICS for BUSINESS and ECONOMICS, authored by Anderson, Sweeney, Williams, 2012, SOUTH- WESTERN CENGAGE Learning. ISBN 13: 978-0-538-48165-6; this has been updated to a more recent edition.) Enter the two sets of data. Evaluate your data by using EXCEL to compute: a. b. 1) 2) 3) REGRESSION ANALYSIS DESCRIPTIVE STATISTICS SCATTERPLOTS Note: Make certain that the regression coefficients (a and b in the equation y = a + bx) in C.3.b.2) and C.3.b.3) are equal, frequently errors are made in these EXCEL applications which result in switching the dependent variable and independent variable. 4. E. 5. Analyze the output for both sets of data, be certain to evaluate and discuss the statistical significance of the slope (b in the equation y = a +bx) and the coefficient of determination (r). Use a 10 % (.10 ) level of significance for each variable. (Include all statistical computer output in your report.) D. IS THE BOND RATING ACCURATE? Read the definition of the rating given to the bond you are analyzing and compare it to your findings in A - C with the objective of determining if the bond rating is accurate. Be certain to draw on the information you have presented in B. for this section of the paper. Calculate and interpret, for your bond, the current and modified duration. (Include the spreadsheet output in your report.) INTEREST RATE FORECAST FOR ONE YEAR (12 Months) (INTEREST RATE RISK, REINVESTMENT RISK) 2. 1. Utilizing citable resources present succinctly (one or two paragraphs is sufficient) "your" outlook for interest rate levels over the next 12 months. (I am not looking for a month-to-month forecast rather I am interested in the trend for interest rates and levels at the end of one year+ [December 2018] for the type [i.e., bond rating, years remaining until maturity] of instrument you are evaluating.) Let me emphasize that I am not requiring you personally to forecast interest rates. Likewise, I am not telling you that you cannot should you so desire, but rather to extract from topical information in current periodicals, web sites, and other media sources what the "experts" are forecasting. (Please be certain to properly footnote these sources.) 3. A starting point is to calculate the difference between the most recent YTM on your risk class of bond, based on the bond rating reference listed in MERGENT's market averages, and the risk free rate on a treasury security (bond, note, or treasury bill) of a similar term to maturity. Take this marginal difference and apply it to the forecast for treasury security rates, in one year, as an estimate for interest rates on your risk class of bond. (For example, if the bond you are evaluating is an A Rated Bond and it has 20 years remaining until it matures then the AYTMMARKET A RATED BOND AUGUST 2016 - YTM RISK FREE LT GOVERNMENT BOND AUGUST 2016) The reason you are relating the forecast to federal government risk free securities, is that these risk free securities are the instruments you are most likely to find forecasted information about in topical publications, TV reports and web sites, for one year from now in 2018. F. 4. 5. Calculate the APrice for the bond, given your forecasted interest rate change, utilizing, from C.5, information for the modified duration. If the results of your regression are statistically significant, C.3.b.3), use the equation along with an estimate for the independent variable, E.1, to forecast the YTM one year from now for your corporate bond. Interpret the results, do they make sense? Why? SUMMARY Based on all your information in sections A - E, would you buy this bond? Briefly discuss why or why not. 1. You need to select a Corporate Bond that is a Good Faith and Credit Instrument. This corporate bond should: a. Not be a Senior bond b. No pledge of any assets to back the bond you select c. No foreign corporate bonds (thus, no need to evaluate foreign exchange risk) d. The designation of the corporate bond being a Debenture or Note is the best indicator that you are selecting the correct type of bond. 2. Not all firms have issued Corporate Bonds - If you are interested in a particular firm, but it has no Corporate Bonds outstanding, select another company in the same industry that does have a corporate bond outstanding. Your evaluation of this alternative firm and the industry can be of use in later assignments. 3. It is probably best to select an S&P 500 firm, but this is not required. Lots of these firms will have multiple bonds outstanding that will qualify for this assignment. 4. The bond that you select must have at least a two year maturity remaining, thus at least 24 months are remaining in its life. 5. The bond that you select should have been issued at least 5 years ago (2013), although there is some flexibility here for your selection. 6. The bond rating is important in the evaluation process for this assignment but you can select either an Investment Grade or a Speculative Grade (Junk Bond) bond. A. B. GENERAL BOND AND INVESTOR INFORMATION What I'm looking for Briefly discuss the general characteristics of the bond touching on: 1. 1. a. b. 2. A brief discussion of why you selected this bond to analyze, emphasizing how your investment objectives and/or your business interests have resulted in this selection. EVALUATION OF THE CORPORATE BOND'S UNSYSTEMATIC RISK Corporation's Ability to Repay Principal - This entails the identification or calculation of key financial ratios for both their current financial data and historical values. a. b. Finacial and nowmrative. C. A brief description of the company that issued the bond. A brief description of the bond issue; such as the original life of the bond, life remaining, coupon rate, if the bond is callable, current rating, current yield, etc. Identify these key ratios based on our text and lecture. (NOTE: These can be selected, in certain instances it might be necessary to calculate the financial ratio based on financial data provided in financial statements in the database, from the Standard & Poor's - Net Advantage and MORNINGSTAR in the ALADIN databases, you might find the company reports in Value Line useful, this is also in the ALADIN databases..) (Note: You might also find useful the key financial statements and financial ratios that are available on the Internet at Yahoo's web site, http://finance.yahoo.com/) Compare these results to industry standards available from published sources or preferably compare to the industry leader (sales/revenue) [or number two (sales/revenue) in the industry if you are analyzing the industry leader] based on financial ratios from the ALADIN databases, et. al. In addition, include an evaluation of the company's ratios, from B.1.a, over time, what is commonly referred to as trend analysis. C. 3. 1. 2. 2. Credit Position of the Company Discuss the debt-paying experience of the company. (Use the information about this company's current and historic bond ratings.) Has the company ever defaulted? What is the character of the issuing corporation? a. Corporation's Ability to Pay Interest - Same procedure as in 1 above. Note: As per our class discussion, Standard & Poor's Bond Guide, (both hard copy and in their database) provides information about an interest coverage ratio, and calculates this value over several years. b. C. EVALUATION OF THE CORPORATE BOND'S INVESTMENT RETURN AND SYSTEMATIC RISK Determine the Yield-To-Maturity (YTM) based on quarterly periods (March, June, September, December) for the past nineteen periods. (March 2013 through September 2017). [If September 2017 is not available, use data through June 2017.] Look-up Bond Yield Averages for the corresponding nineteen quarterly periods (available in either Standard & Poor's Bond Guide or MERGENT's Bond Record as per handout example) by the same bond rating classification. (Note: These publications are in the Marymount University Ballston Library.) 3. دیا Utilizing EXCEL, (this is also available at our Computer Lab) complete the following statistical analysis: (Note: The best and most succinct discussion on using and interpreting EXCEL is the statistics text STATISTICS for BUSINESS and ECONOMICS, authored by Anderson, Sweeney, Williams, 2012, SOUTH- WESTERN CENGAGE Learning. ISBN 13: 978-0-538-48165-6; this has been updated to a more recent edition.) Enter the two sets of data. Evaluate your data by using EXCEL to compute: a. b. 1) 2) 3) REGRESSION ANALYSIS DESCRIPTIVE STATISTICS SCATTERPLOTS Note: Make certain that the regression coefficients (a and b in the equation y = a + bx) in C.3.b.2) and C.3.b.3) are equal, frequently errors are made in these EXCEL applications which result in switching the dependent variable and independent variable. 4. E. 5. Analyze the output for both sets of data, be certain to evaluate and discuss the statistical significance of the slope (b in the equation y = a +bx) and the coefficient of determination (r). Use a 10 % (.10 ) level of significance for each variable. (Include all statistical computer output in your report.) D. IS THE BOND RATING ACCURATE? Read the definition of the rating given to the bond you are analyzing and compare it to your findings in A - C with the objective of determining if the bond rating is accurate. Be certain to draw on the information you have presented in B. for this section of the paper. Calculate and interpret, for your bond, the current and modified duration. (Include the spreadsheet output in your report.) INTEREST RATE FORECAST FOR ONE YEAR (12 Months) (INTEREST RATE RISK, REINVESTMENT RISK) 2. 1. Utilizing citable resources present succinctly (one or two paragraphs is sufficient) "your" outlook for interest rate levels over the next 12 months. (I am not looking for a month-to-month forecast rather I am interested in the trend for interest rates and levels at the end of one year+ [December 2018] for the type [i.e., bond rating, years remaining until maturity] of instrument you are evaluating.) Let me emphasize that I am not requiring you personally to forecast interest rates. Likewise, I am not telling you that you cannot should you so desire, but rather to extract from topical information in current periodicals, web sites, and other media sources what the "experts" are forecasting. (Please be certain to properly footnote these sources.) 3. A starting point is to calculate the difference between the most recent YTM on your risk class of bond, based on the bond rating reference listed in MERGENT's market averages, and the risk free rate on a treasury security (bond, note, or treasury bill) of a similar term to maturity. Take this marginal difference and apply it to the forecast for treasury security rates, in one year, as an estimate for interest rates on your risk class of bond. (For example, if the bond you are evaluating is an A Rated Bond and it has 20 years remaining until it matures then the AYTMMARKET A RATED BOND AUGUST 2016 - YTM RISK FREE LT GOVERNMENT BOND AUGUST 2016) The reason you are relating the forecast to federal government risk free securities, is that these risk free securities are the instruments you are most likely to find forecasted information about in topical publications, TV reports and web sites, for one year from now in 2018. F. 4. 5. Calculate the APrice for the bond, given your forecasted interest rate change, utilizing, from C.5, information for the modified duration. If the results of your regression are statistically significant, C.3.b.3), use the equation along with an estimate for the independent variable, E.1, to forecast the YTM one year from now for your corporate bond. Interpret the results, do they make sense? Why? SUMMARY Based on all your information in sections A - E, would you buy this bond? Briefly discuss why or why not.
Expert Answer:
Answer rating: 100% (QA)
Here is a draft response addressing the queries related to evaluating a corporate bond using the Yahoo Finance URL content A GENERAL BOND AND INVESTOR ... View the full answer
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
Posted Date:
Students also viewed these finance questions
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
Planning is one of the most important management functions in any business. A front office managers first step in planning should involve determine the departments goals. Planning also includes...
-
The following additional information is available for the Dr. Ivan and Irene Incisor family from Chapters 1-5. Ivan's grandfather died and left a portfolio of municipal bonds. In 2012, they pay Ivan...
-
The quarterly sales for a software product over the past three years are given in the table below. 1) Forecast the demand for year 4 using the moving average technique for 3 periods. 1) Compute the...
-
Alabama Service Company was formed on January 1, 2014. Events Affecting the 2014 Accounting Period 1. Acquired cash of $60,000 from the issue of common stock. 2. Purchased $1,200 of supplies on...
-
Analytical procedures can be powerful tools in conducting an audit. They help the auditor understand a clients business and are useful in identifying potential risks and problem areas requiring...
-
Find the free-vibration response of a viscously damped single-degree-of-freedom system with \(m=k=c=1\), using the central difference method. Assume that \(x_{0}=0, \dot{x}_{0}=1\), and \(\Delta...
-
The Awake Coffee Company produces gourmet instant coffee. The company wants to be sure that the average fill of coffee containers is 12.0 ounces. To make sure the process is in control, a worker...
-
SJS Industries purchased $30,000 of merchandise on August 4, 2025, subject to a trade discount of 6% and with credit terms of 2/10, n/30. The company returned $2,500 (gross price before trade or cash...
-
Name the following alcohols according to the IUPAC nomenclature system. Indicate stereochemistry (if any) and label the hydroxy groups as primary, secondary, or tertiary. OH Br OH (a) CH;CH,CHCH; (b)...
-
[References] Identify the absolute configuration of the chirality centers in each of the following compounds as R or S. Note: if multiple chirality centers are present, indicate the stereochemical...
-
In some animal species, exposure to males reduces lifespan of females, because of the damage caused by harassment and male seminal fluids. In other species, exposure to other females is more harmful...
-
Fill in the blanks to make the following statements correct. a. In our macro model exports ( X ) are _________ with respect to domestic national income, but the X function will shift in response to...
-
Fill in the blanks to make the following statements correct. a. In our macro model, government purchases ( G ), is __________ with respect to national income. b. G does not include ____________ . Net...
-
Post-Keynesians suggest that contractual agreements might be a way to deal with asymmetric information. a. Name a business or consumer transaction where asymmetric information might occur. b. How...
-
Adam Smith argued that at birth most people were similarly talented, and that differences in individual abilities, and hence productivity, are largely the effect of the division of labor, not its...
-
Below are nominal GDP figures for the nation of Balmoral. Don't include % or comma (,) with your answers. CoursHeroTranscribedText Below are nominal GDP figures for the nation of Balmoral. Don't...
-
The Ranch 888 Noodle Company sells two types of dried noodles:ramen, at $6.50 per box, and chow fun, at $7.70 per box. So farthis year, the company has sold a total of 110,096 boxes ofnoodles,...
-
Rebecca and Walter Bunge have been married for 5 years. They live at 883 Scrub Brush Street, Apt. 52B, Las Vegas, NV 89125. Rebecca is a homemaker and Walt is a high school teacher. Rebecca's Social...
-
The following additional information is available for the Dr. Ivan and Irene Incisor family. Ivan and Irene have the following investment income, in addition to that reported in Chapter 1: Dividends...
-
Professor Patricia (Patty) Pate is retired from the PalmSprings Culinary Arts Academy (PSCAA). She is a single taxpayer and is 68 years old. Patty lives at 98 Colander Street, Henderson, NV 89052....
-
With reference to Exercise 11.65, test the null hypothesis \(\beta=1.5\) against the alternative hypothesis \(\beta>1.5\) at the 0.01 level of significance. Data From Exercise 11.65 11.65 The data...
-
The data below pertains to the number of hours a laptop has been charged for and the number of hours of backup provided by the battery. (a) Use the first set of expressions on page 330, involving...
-
With reference to Exercise 11.65, construct a \(99 \%\) confidence interval for \(\alpha\).
Study smarter with the SolutionInn App