Understanding how to properly value a vanilla bond is essential for finance. Find a company with debt and that pays dividends. You can use the following stock screener to find a company: http://www.google.com/finance/stockscreener. Add the criteria of long-term debt to assets to ensure the company has debt. Add the criteria of dividend per share. Find the company’s financial pages at: http://www.sec.gov/edgar.shtml. Look at the long-term debt on the balance sheet. Determine the coupon price, the length until maturity and the yield to maturity. Calculate today’s price of the bond.
- List the pertinent information on the bond you chose and then calculate the price of one bond from one company.
- Choose another company, find a bond, list all pertinent information and calculate today’s price.
- Which bond is receiving the better price? Explain your answer.
- From a time value of money frame of mind, what does each rate say about the viewpoint on the time value of money?
- What does that tell you about the credit rating of each company?
- Which company has a better credit rating? Explain your answer.
- Based on the credit rating, which company do you think the bank feels more secure will pay back the loan? Explain your answer.
- Why does the bank charge more interest for one company than another?
- What does the credit rating say to an investor?
- Which bond looks more attractive from the company’s view point? Explain why you chose the answer you did.
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