You are an intern with Ford Motor Company in its corporate finance division. The firm is planning

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Question:

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.

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.

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 Bonds Online (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 spreadsheet that I have given you. (We will work this problem with the spreads as of 3/28/14.)

Find the current bond rating for Ford. Go to Standard & Poor’s Website (www.standardandpoors.com). Select “Find a Rating” from the list at the left of the page, then select “Credit Rating Search.” At this point, you will have to register (it’s free). Next, you will be able to search by Organization Name—enter 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.

Return to Excel and create a timeline with the discount rates you will need to value the new bond issue.

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 spreadsheet (and the last line of the table in this exercise).

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.

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.

Compute the additional cash proceeds that could be raised from the issue if the rating were improved.

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 spreadsheet to class and have your computer open to excel during our synchronous session.

Reuters Corporate Spreads for Industrials
3/28/2014
	1	2	3	4	5	6	7	8	9	10	30
Rating	1 yr	2 yr	3 yr		5 yr		7 yr			10 yr	30 yr
Aaa/AAA	5	8	12		18		28			42	65
Aa1/AA+	10	18	25		34		42			54	77
Aa2/AA	14	29	38		50		57			65	89
Aa3/AA-	19	34	43		54		61			69	92
A1/A+	23	39	47		58		65			72	95
A2/A	24	39	49		61		69			77	103
A3/A-	32	49	59		72		80			89	117
Baa1/BBB+	38	61	75		92		103			115	151
Baa2/BBB	47	75	89		107		119			132	170
Baa3/BBB-	83	108	122		140		152			165	204
Ba1/BB+	157	182	198		217		232			248	286
Ba2/BB	231	256	274		295		312			330	367
Ba3/BB-	305	330	350		372		392			413	449
B1/B+	378	404	426		450		472			495	530
B2/B	452	478	502		527		552			578	612
B3/B-	526	552	578		604		632			660	693
Caa/CCC+	600	626	653		682		712			743	775
US Treasury Yield	0.13	0.45	0.93		1.74		2.31			2.74	3.55