You are an intern with Sirius Satellite Radio in their 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 Sirius' current debt rating and the yield curve for their particular rating.
1. Begin by finding the current U.S. Treasury yield curve. At the Treasury Web site (www.treas.gov),search using the term "yield curve" and select "US Treasury—Daily Treasury Yield Curve." Beware: There will likely be two links with the same title. Look at the description below the link and select the one that does NOT say "Real Yield..." You want the nominal rates. The correct link is likely to be the first link on the page. Download that table into Excel by right clicking with the cursor in the table and selecting "Export to Microsoft Excel."
2. Find the current yield spreads for the various bond ratings. Unfortunately, the current spreads are available only for a fee, so you will use old ones. Go to BondsOnline (www.bondsonline.com) and click "Today's Market." Next, click "Corporate Bond Spreads." Download this table to Excel and copy and paste it to the same file as the Treasury yields.
3. Find the current bond rating for Sirius. Go to Standard & Poor's Web site (www.standardandpoors.com). Select "Find a Rating" from the list at the left of the page, then select "Credit Ratings Search." At this point, you will have to register (it's free) or enter the user-name and password provided by your instructor. Next, you will be able to search by Organization Name—enter Sirius and select Sirius Satellite Radio. Use the credit rating for the organization, not the specific issue ratings.
4. Return to Excel and create a timeline with the cash flows and discount rates you will need to value the new bond issue. To create the required spot rates for Sirius' issue add the appropriate spread to the Treasury yield of the same maturity.
a) The yield curve and spread rates you have found do not cover every year that you will need for the new bonds. Specifically, you do not have yields or spreads for four-, six-, eight-, and nine-year maturities. Fill these in by linearly interpolating the given yields and spreads. For example, the four-year spot rate and spread will be the average of the three- and five-year rates. The six-year rate and spread will be the average of the five- and seven-year rates. For years 8and 9 you will have to spread the difference between years 7 and 10 across the two years.
b) To compute the spot rates for Sirius' current debt rating, add the yield spread to the Treasury rate for each maturity. However, note that the spread is in basis points, which are 1/100th of a percentage point.
c) Compute the cash flows that would be paid to bondholders each year and add them to the timeline.
5. Use the spot rates to calculate the present value of each cash flow paid to the bondholders.
6. Compute the issue price of the bond and its initial yield to maturity.
7. Repeat steps 4-6 based on the assumption that Sirius 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.
8. Compute the additional cash proceeds that could be raised from the issue if the rating were improved.© BrainMass Inc. brainmass.com October 17, 2018, 12:58 pm ad1c9bdddf
This response looks at Sirius Satellite Radio's corporate finance division. It provides guidelines on calculating the company's current debt rating and the yield curve for their particular rating.
Selling a Goldmine/Bonds
Part I: Suppose you owned a goldmine. All of the gold will run out in two years, but your expected profits from the gold over the next two years are:
Year 1: $110,000 Year 2: $350,000
A. If the discount rate is 5% what is the present value of your profits at the end of Year 1 and Year 2?
B. With a discount rate of 7% how much would you be willing to sell your goldmine for now? Explain both your reasoning and your calculations
C. If you believed that Interest rates and inflation were going to go up during the next two years, would you want a higher price for your goldmine than your answer in B? Explain your reasoning
D. If your goldmine was located in an unstable third world country rather than the U.S., would you expect potential buyers to pay a higher or lower price for your goldmine?
Part II: Suppose you have a choice between two corporate bonds. Both of which will give you a payment of $1,000 in one year assuming that the corporation is able to meet its financial obligations. One is a bond from Pfizer Inc., the other is a bond from Sirius Satellite Radio.
Which of these two bonds would you pay a higher price for? i.e. which of these two corporations should have a lower discount rate?
Take into account such matters as the riskiness of each company, inflation, interest rate and any other factor that might affect the discount rate you would want from a bond from these firms.
YOU DO NOT have to do any calculations for Part II, just explain which bond you would be willing to pay a higher price for and justify your answer.
Turn in Parts I and II in one Word document. For Part I make sure you show all your work. Part II should be in the form of a two to three page paper explaining your reasoning.View Full Posting Details