RJR Receives from bondholders, Yen RJR's Objective: Step 2) RJR issues a Yen bond. Issue...

   

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RJR Receives from bondholders, Yen RJR's Objective: • Step 2) RJR issues a Yen bond. Issue Size Yen 25 Bil. Price 100.25%. Fees 1.875%. Coupon Rate 6.375%. 5 year maturity. • Step 3) • Step 4) Find IRRs: mil Step 1). Converted proceeds of Yen Bond issue: $ 2 3 4 RJR agrees to pay the bondholders, mil/year and Yen 5 Yen mil. Final Principal amount. RJR wants to receive (as well as pay back) Dollars (not Yens). This is done quite easily. Initial Yen proceeds received by RJR can be coverted to Dollars in the Spot market (step 1 below) and future Yen payments can be 'swapped' into Dollars (steps 2, 3, and 4 below). Once the SWAP is set-up, RJR will make Dollar payments to a counter-party and the counter-party will pay Yen to RJR and RJR can make the promised Yen payments to bondholders. Let's call the counter-party 'bank' for this discussion. RJR can use this money as if it had issued a Dollar bond. Find Notional Principal of the Yen payments. If RJR, hypothetically or notionally, writes a single check for this amount, the bank will be happy to take the money today. In return, the bank will pay the future Yen payments to the bondholders. Notional Principal: Yen Find Notional Principal in Dollars. If RJR, hypothetically or notionally, writes a single check for this amount, the bank will be happy to take the money today. In return, the bank will pay the future Yen payments to the bondholders. Notional Principal: S RJR does not want to pay by a single check (it does not have the money and the whole idea is to borrow today and pay back in the future). Pretend that NPs is the amount borrowed from the bank. What sort of payments will the bank require over the next 5 years? The bank will be happy to take these amounts from RJR over the next 5 years. In return, the bank will pay the future Yen payments to the bondholders. Yearly Payments from RJR to the Bank: inal Payment of tional Principal: 0 Initial S, From step 1 1 2 3 4 Future $ payments, From step 4 5 4 5 6 7 Eurodollar Bond 9 10 11 12 13 14 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 IRR$ 15 16 EuroYen Bond 17 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 70 71 72 73 74 75 76 77 78 79 80 price fees net 81 82 83 84 85 86 87 88 89 90 91 92 Cashflow 93 94 95 96 97 RJ Reynolds International Financing Price Yen Fees Yen Net Yen Principal 100 Issue Size 25 Bil Yens Cashflow Yen MM 100.125 -1.875 98.25 $98.250 ($10.125) ($10.125) ($10.125) ($10.125) ($110.125) 10.59% Cashflow $ MM 59 60 Dual Currency Bond 61 62 63 64 65 66 67 68 69 Price Yen Fees Yen Net Yen Face Value 100.25 -1.875 98.375 24593.75 -1593.75 -1593.75 -1593.75 -1593.75 -26593.75 RJR does not want FX risk inherent in Yen CF. They want to convert this to a $ CF This conersion from Yen CF to $ CF can be done in two ways, A) Using FORWARD or B) Using SWAP. A) Yen cashflow hedged into $ with FORWARD Forward Rates 236.9 offer IRR$ Exhibit 7 B)Yen Cashflow hedged into $ with SWAP IRR$ Exhibit 7 101.5 -1.875 99.625 10.64% 1) Convert intitial yen CF into $ using FX rate (Offer) $103.8149 2) Find Yen PV of future Yen CF using 7.1% (lower or bid rate) Notional Yen Principal, NP ... MM -24258.82 3) Convert this number (NP v..) to $, use yen 236.8/$ Notional $ Principal, NP, ($102.444) 4) Find PMT for a bond. Use 'NP, as PV and FV. Use 10.92% (higher or offer rate) or simply multiply NP $ by 10.92% 100 Redemption $115.956 MM $ IRR$ Exhibit 7 Cashflow Yen MM 24906.25 $103.8149 ($6.8904) ($7.1181) ($7.3922) ($7.6956) ($134.5838) ($11.1869) 5) To show actual $ cashflows for RJR, use actual $CF from '1' as 'PV'. Use CF from '4' as future CF. Final CF is PMT+NP, $103.8149 ($11.1869) ($11.1869) ($11.1869) ($11.1869) ($113.6313) 10.56% 231.3 bid A) Yen cashflow hedged into $ with FORWARD Forward Rates 236.9 offer $105.1340 10.21% -1937.5 223.9 bid B)Yen Cashflow hedged into $ with SWAP 231.3 bid ($8.3766) 215.6 bid -1937.5 RJR does not want FX risk inherent in Yen CF. They want to convert this to a $ CF This conversion from Yen CF to $ CF can be done in two ways, A) Using FORWARD or B) Using SWAP. 223.9 bid 207.1 bid -1937.5 1) Convert intitial yen CF into $ using FX rate (Offer) 215.6 bid -1937.5 197.6 bid 207.1 bid -1937.5 ($115.9560) 197.6 bid ($9.8052) ($8.6534) ($8.9865) ($9.3554) ($125.7612) Exhibit 81 $105.1340 2) Find Yen PV of future Yen CF using 7.1% (lower or bid rate) Notional Yen Principal, NP ... MM -7922.907 3) Convert this number (NP..) to $, use yen 236.8/$ Notional $ Principal, NP, MM ($33.4582) 4) Find PMT for an annuity. Use 'NP, as PV. Use 10.92% (higher or offer rate) Use FV=0. Exhibit 8 and 9 IRRyen ($9.0346) 5) To show actual $ cashflows for RJR, use actual $ CF from '1' as 'PY". Use CF from '4' as future CF Add 'Redemption Payment to the final cashflow $105.1340 ($9.0346) ($9.0346) ($9.0346) ($9.0346) ($124.9906) IRR$ 10.27% 6.77% EAR$ of Annual and Semi-Annual Bonds Exhibit 9 IRR$ Semi Annual Bond @ APR 10.64% or 10.64/2 effective-six-month rate. This is a higher rate than 10.92% annual 10.92302% EAR$ ($5.4500) $103.8149 IRR$ Exhinit 8 and 9 Exhibit 8 and 9 5.32 ($5.4500) ($5.4500) ($5.4500) 5.25% per six-month ($5.4500) ($5.4500) ($5.4500) ($5.4500) ($5.4500) ($5.4500) ($109.2649) IRR$ as EAF 10.78% RJR Receives from bondholders, Yen RJR's Objective: • Step 2) RJR issues a Yen bond. Issue Size Yen 25 Bil. Price 100.25%. Fees 1.875%. Coupon Rate 6.375%. 5 year maturity. • Step 3) • Step 4) Find IRRs: mil Step 1). Converted proceeds of Yen Bond issue: $ 2 3 4 RJR agrees to pay the bondholders, mil/year and Yen 5 Yen mil. Final Principal amount. RJR wants to receive (as well as pay back) Dollars (not Yens). This is done quite easily. Initial Yen proceeds received by RJR can be coverted to Dollars in the Spot market (step 1 below) and future Yen payments can be 'swapped' into Dollars (steps 2, 3, and 4 below). Once the SWAP is set-up, RJR will make Dollar payments to a counter-party and the counter-party will pay Yen to RJR and RJR can make the promised Yen payments to bondholders. Let's call the counter-party 'bank' for this discussion. RJR can use this money as if it had issued a Dollar bond. Find Notional Principal of the Yen payments. If RJR, hypothetically or notionally, writes a single check for this amount, the bank will be happy to take the money today. In return, the bank will pay the future Yen payments to the bondholders. Notional Principal: Yen Find Notional Principal in Dollars. If RJR, hypothetically or notionally, writes a single check for this amount, the bank will be happy to take the money today. In return, the bank will pay the future Yen payments to the bondholders. Notional Principal: S RJR does not want to pay by a single check (it does not have the money and the whole idea is to borrow today and pay back in the future). Pretend that NPs is the amount borrowed from the bank. What sort of payments will the bank require over the next 5 years? The bank will be happy to take these amounts from RJR over the next 5 years. In return, the bank will pay the future Yen payments to the bondholders. Yearly Payments from RJR to the Bank: inal Payment of tional Principal: 0 Initial S, From step 1 1 2 3 4 Future $ payments, From step 4 5 4 5 6 7 Eurodollar Bond 9 10 11 12 13 14 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 IRR$ 15 16 EuroYen Bond 17 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 70 71 72 73 74 75 76 77 78 79 80 price fees net 81 82 83 84 85 86 87 88 89 90 91 92 Cashflow 93 94 95 96 97 RJ Reynolds International Financing Price Yen Fees Yen Net Yen Principal 100 Issue Size 25 Bil Yens Cashflow Yen MM 100.125 -1.875 98.25 $98.250 ($10.125) ($10.125) ($10.125) ($10.125) ($110.125) 10.59% Cashflow $ MM 59 60 Dual Currency Bond 61 62 63 64 65 66 67 68 69 Price Yen Fees Yen Net Yen Face Value 100.25 -1.875 98.375 24593.75 -1593.75 -1593.75 -1593.75 -1593.75 -26593.75 RJR does not want FX risk inherent in Yen CF. They want to convert this to a $ CF This conersion from Yen CF to $ CF can be done in two ways, A) Using FORWARD or B) Using SWAP. A) Yen cashflow hedged into $ with FORWARD Forward Rates 236.9 offer IRR$ Exhibit 7 B)Yen Cashflow hedged into $ with SWAP IRR$ Exhibit 7 101.5 -1.875 99.625 10.64% 1) Convert intitial yen CF into $ using FX rate (Offer) $103.8149 2) Find Yen PV of future Yen CF using 7.1% (lower or bid rate) Notional Yen Principal, NP ... MM -24258.82 3) Convert this number (NP v..) to $, use yen 236.8/$ Notional $ Principal, NP, ($102.444) 4) Find PMT for a bond. Use 'NP, as PV and FV. Use 10.92% (higher or offer rate) or simply multiply NP $ by 10.92% 100 Redemption $115.956 MM $ IRR$ Exhibit 7 Cashflow Yen MM 24906.25 $103.8149 ($6.8904) ($7.1181) ($7.3922) ($7.6956) ($134.5838) ($11.1869) 5) To show actual $ cashflows for RJR, use actual $CF from '1' as 'PV'. Use CF from '4' as future CF. Final CF is PMT+NP, $103.8149 ($11.1869) ($11.1869) ($11.1869) ($11.1869) ($113.6313) 10.56% 231.3 bid A) Yen cashflow hedged into $ with FORWARD Forward Rates 236.9 offer $105.1340 10.21% -1937.5 223.9 bid B)Yen Cashflow hedged into $ with SWAP 231.3 bid ($8.3766) 215.6 bid -1937.5 RJR does not want FX risk inherent in Yen CF. They want to convert this to a $ CF This conversion from Yen CF to $ CF can be done in two ways, A) Using FORWARD or B) Using SWAP. 223.9 bid 207.1 bid -1937.5 1) Convert intitial yen CF into $ using FX rate (Offer) 215.6 bid -1937.5 197.6 bid 207.1 bid -1937.5 ($115.9560) 197.6 bid ($9.8052) ($8.6534) ($8.9865) ($9.3554) ($125.7612) Exhibit 81 $105.1340 2) Find Yen PV of future Yen CF using 7.1% (lower or bid rate) Notional Yen Principal, NP ... MM -7922.907 3) Convert this number (NP..) to $, use yen 236.8/$ Notional $ Principal, NP, MM ($33.4582) 4) Find PMT for an annuity. Use 'NP, as PV. Use 10.92% (higher or offer rate) Use FV=0. Exhibit 8 and 9 IRRyen ($9.0346) 5) To show actual $ cashflows for RJR, use actual $ CF from '1' as 'PY". Use CF from '4' as future CF Add 'Redemption Payment to the final cashflow $105.1340 ($9.0346) ($9.0346) ($9.0346) ($9.0346) ($124.9906) IRR$ 10.27% 6.77% EAR$ of Annual and Semi-Annual Bonds Exhibit 9 IRR$ Semi Annual Bond @ APR 10.64% or 10.64/2 effective-six-month rate. This is a higher rate than 10.92% annual 10.92302% EAR$ ($5.4500) $103.8149 IRR$ Exhinit 8 and 9 Exhibit 8 and 9 5.32 ($5.4500) ($5.4500) ($5.4500) 5.25% per six-month ($5.4500) ($5.4500) ($5.4500) ($5.4500) ($5.4500) ($5.4500) ($109.2649) IRR$ as EAF 10.78%

Answer rating: 100% (QA)

Here are the stepbystep calculations for the RJR yen bond problem 1 Issue Size Yen 25 Bil Price 1... View the full answer