Fi 473 Case

...

d) Why don’t we see more of these?

Century bonds can not be seen mostly in our life .Firstly , for individual , 100-year is beyond the lifespan of investors. Secondly , many people and organizations do not believe the company will keep developing and not default .

e) Under what conditions do you expect NSC to redeem those bonds?

If the interest rates decrease and lower than the coupon rate that will cause the company lose money .During this circumstance, NSC might redeem those bonds.

IBM Floating Rate Note:

a) What is different about this issue?

Different from others, IBM issued one floating rate note. Floating rate note is a debt instrument with a variable interest rate. It tends to become more popular when interest rates are expected to increase. The reason why is, compared to other kinds of notes, like fixed-rate note, floating rate note protects investors against a unforecastable rise in interest rate. Likewise, investor would lose some interest when facing deflation time, which decrease in interest rate.

b) What is the rate? What should we compare it with?

Rate for this particular note is LIBOR plus 0.03%, which LIBOR is a benchmark rate that some of the world’s leading banks charge each other for short-term loans. We should compare the variability of interest with other kinds of note. For example, from exhibit 7, LIBOR had over 9% in 9/1/1989, but it went to just 0.7269% in 6/1/2011. The time IBM issued note was right after financial crisis. The global economic was got hurt pretty bad. LIBOR rate won’t be high for a long time. Compared with senior unsecured notes offered fixed-rate based on time to maturity. Unsecured notes seem were better options for investors to choose. Based on my research for LIBOR rate history, the average rate since DEC.2010 to DEC.2012 was about 0.9169%,(fedprimerate) and it was even lower than one fixed-rate note: the lowest rate on record, 1%, issued by IBM just few months before this floating rate note issued.

c) Why IBM is raising funds?

IBM’s disclosures indicated that issue proceeds would be used for general corporate purpose. LIBOR rate won’t go high for a long time, so that IBM issued a two-year note that can borrow money from investors for a such low interest rate. Two to three years after financial crisis, time to maturity, if the LIBOR rate started to increase, IBM can stop issue another floating rate note. Otherwise, IBM could issue another floating rate note to raise funds.

Cephalon

a) How do these work?

The convertible senior subordinated notes are effectively subordinated to all of their secured debt to degree the collateral securing that debt and the notes are helped them to rank junior to their subsidiaries’ liabilities. Stockholders have rights to exchange the bond for common stock. Also the company pays interest on the notes on May 1 and November 1 of each year.

b) How can small no-name company issue debt at 2.5% when Coca Cola has to pay 4.25%?

I think there are two main reasons about why the small no-name company issues debt at 2.5% when Coca Cola has to pay 4.25%. The first reason is convertible senior subordinated notes. Imagine if the issuer becomes bankrupt, and liquidates its assets, the note will be repaid after other debt securities have been paid. And the second reason is the company is smaller then Coca Cola, they wouldn’t have to afford the 4.25% payout n bonds.

c) How do you participate in upside?

To participate in upside, there is a good way to increase income and securities is sell or surrendering their notes for conversion at the right time.

Reference

Convertible Subordinate Note Definition | Investopedia. (2003, November 19). Retrieved September 21, 2015. http://www.investopedia.com/terms/c/convertiblesubordinatednote.asp

LIBOR Rates History: Historical LIBOR Rate Information. (n.d.). Retrieved September 21, 2015. http://www.fedprimerate.com/libor/libor_rates_history.htm