The dynamics of bond pricing can often provide trading opportunities for investors that are positioned to...
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The dynamics of bond pricing can often provide trading opportunities for investors that are positioned to take risk. A real-world example is 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. Description of 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 $1,050 Bond Ratings: S&P B Moody's B2 Credit Information as of 2/2/16 (Source: Bloomberg) Credit Information as of 2/2/16 (Source: Bloomberg) Key Financial Data ($Millions) Revenues Company Adj. EBITDA Margin(%) EBIT Margin (%) Net Income Capital Expenditures Free Cash Flow Last 12 Mos. Dividend Excess Cash Flow Total Debt Debt/EBITDA Debt/EBITDA: Median BBB Tier Median BB Tier 2014 17,507 1,698 9.70% 413 2.36% 102 (419) 1,073 (29) 1,044 3,498 2.1x 2.30x 3.10x 2016 and 2017 are projected. 2015 2016p 2017p 10,340 12,119 148 771 6.36% (27) -0.22% 1.43% (402) -3.89% -488 (377) 139 (29) 110 3,161 21.4x 2.30x 3.10x 11,527 576 5.00% (6) 0.05% 129 (377) 128 (29) 99 3,161 5.5x 2.30x 3.10x 67 (448) 136 (29) 107 3,161 4.1x 2.30x 3.10x 4) During the early summer of 2016 the import tariffs on foreign steel were reinstated, allowing domestic steel producers to raise their prices. As a result of this policy change, the US Steel 7.0% bonds maturing on 2/1/18 rose to $912 on 8/2/16. a) (5 points) Assuming that the bonds pay the full par value on maturity, what is the yield to maturity on 8/2/16? Show your calculations on an Excel Spreadsheet. b) (5 points) What is the bond's annualized return from 2/2/16 to 8/2/16 in terms of an effective annual rate (EAR)? Show your calculations. The dynamics of bond pricing can often provide trading opportunities for investors that are positioned to take risk. A real-world example is 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. Description of 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 $1,050 Bond Ratings: S&P B Moody's B2 Credit Information as of 2/2/16 (Source: Bloomberg) Credit Information as of 2/2/16 (Source: Bloomberg) Key Financial Data ($Millions) Revenues Company Adj. EBITDA Margin(%) EBIT Margin (%) Net Income Capital Expenditures Free Cash Flow Last 12 Mos. Dividend Excess Cash Flow Total Debt Debt/EBITDA Debt/EBITDA: Median BBB Tier Median BB Tier 2014 17,507 1,698 9.70% 413 2.36% 102 (419) 1,073 (29) 1,044 3,498 2.1x 2.30x 3.10x 2016 and 2017 are projected. 2015 2016p 2017p 10,340 12,119 148 771 6.36% (27) -0.22% 1.43% (402) -3.89% -488 (377) 139 (29) 110 3,161 21.4x 2.30x 3.10x 11,527 576 5.00% (6) 0.05% 129 (377) 128 (29) 99 3,161 5.5x 2.30x 3.10x 67 (448) 136 (29) 107 3,161 4.1x 2.30x 3.10x 4) During the early summer of 2016 the import tariffs on foreign steel were reinstated, allowing domestic steel producers to raise their prices. As a result of this policy change, the US Steel 7.0% bonds maturing on 2/1/18 rose to $912 on 8/2/16. a) (5 points) Assuming that the bonds pay the full par value on maturity, what is the yield to maturity on 8/2/16? Show your calculations on an Excel Spreadsheet. b) (5 points) What is the bond's annualized return from 2/2/16 to 8/2/16 in terms of an effective annual rate (EAR)? Show your calculations.
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