GRADED DISCUSSION WEEK 4
In your initial response you should answer the main question: If you are an investor who is looking for a corporate bond to invest in, are you going to buy a bond that you chose? To answer this question you should complete three steps:
1). Copy the bond’s quotation from the website.
2). Describe the main elements of the bond:
- Coupon rate
- Calculate annual coupon payment (assuming face value $1,000)
- What is the frequency of coupon payments of the bond? If the frequency is greater than 1, how much is the payment going to be?
- Maturity,
- Explain the meaning of rating.
- The last price listed in the quotation
- How much the investor would pay for the bond assuming a $1,000 face value and using the last price listed in the quotation?
- Calculate the current yield of the bond assuming that the par value of the bond is $1,000
- How much is the YTM listed in quotations for the bond? Explain the meaning of YTM.
- Is the bond callable or not? If the bond that you chose is callable (non-callable), will it change your decision to buy it?
- To find the information on bonds, click on Search in the middle of the screen, under Quick Search type the Issuer Name and the Symbol, and click SHOW RESULTS.
3) Take a look at the balance sheet and income statement of the company. What data or ratios support your decision to buy this bond or not? You should develop a specific recommendation, with supporting rationale to explain your answer.
Reflection – The students also should include a paragraph in the initial response in their own words reflecting on specifically what they learned from the assignment and how they think they could apply what they learned in the workplace.
Week 4 Discussion
- The purpose of this study is to research the Apple Inc. bond, which entails an investor lending money to the bond’s issuer in exchange for the use of the funds, with the understanding that the issuer will pay the investor interest at the coupon rate. The bonds function as an IOU between the lender and the borrower, with the principal repaid at maturity and interest paid at regular intervals.
- Apple Inc. has a coupon rate of 3.85% and a coupon payment of $38.5 per year until maturity in May 2043. The coupon payment is made on an annual basis, with the maturity date set for 2043. The bond’s maturity date on which the bond’s principal amount is paid to the investor at the time the bond obligation expires. It is the most important factor that an investor will weigh against the investment horizon and goals. Apple Inc. is an issuer of long-term bonds.
Rating is a determination of the credit risk or default risk of a bond issuer. Investors can determine interest rates on specific bonds and risk levels with the use of independent credit rating firms. Independent institutions like Moody’s and Standard & Poor’s evaluate credit risk (S&P). The Apple Inc. bond has an AA+ S&P rating and an Aa1 Moody rating (Pandey et al. 2018, p.28).
The most recent quoted price for the Apple Inc. bond is $114.120, and its yield is 2.975.
It will cost the investor $885.888 ($1,000 – $114.112). An obligation with a par value of $1,000 currently has a yield of [($1,000 -$114.112) = $885.888/$114.112 = 7.76332 – 776.332%].
The bond’s return is measured by the Apple YTM, which is 2.975. It determines whether the bond was held to maturity and all coupons were reinvested to see how the real return varied somewhat over time.
The bond issued by Apple Inc. is callable, which means it may be paid off by the issuer before maturity. Whereas if a bond has a call arrangement, it will be paid off at earlier dates when the business chooses a slight premium to par. If interest rates allow Apple Inc. to choose to call bonds at a better rate. Better coupon rates are offered by the Callable bonds (Cheng, 2019, p.17).
- Analyzing Apple Inc.’s financial statement indicates that the P/E ratio is 19.65, a Debt-to-Equity ratio of 1.044, and a higher ROE indicates that the investors will have a higher return from the business and overall earnings. Apple Inc. as a high-growth company has higher ROE thus earnings are reinvested to generate higher ROE.
References:
Cheng, Y. (2019). Valuing and Analyzing Bonds with Embedded Options. Debt Markets and Investments, 453.
Pandey, S., Cordes, J. J., Pandey, S. K., & Winfrey, W. F. (2018). Use of social impact bonds to address social problems: Understanding contractual risks and transaction costs. Nonprofit Management and Leadership, 28(4), 511-528.
