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Case on Bond Evaluation

Case on Bond Evaluation

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Published by Zubairia Khan

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Published by: Zubairia Khan on Jun 12, 2012
Copyright:Attribution Non-commercial

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07/10/2013

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Abstract of the analysis
The Case is……..
 
The case is concerned about
Annie Hegg’s proposed investment in Atilier Industries
Bonds. We solved the case with our best effort. We tried to make it sure that theinvestment that Annie Hegg is going to make is safe and will ensure maximum level of return for the investor. We explore the best consulting agencies portfolio to know thestandard of analysis. We keep it in mind that our calculation will help someone to take adecision that would cause optimum return or optimum loss to that person. So, veryprecisely, we attempted to suggest the best and safest rates to the specific issues of thecase. Moreover, we were aware of the optimum return that the investor should getfrom the investment decisions.In the analysis, we tried to project some specific suggestions that would be helpful tothe investor to invest in the concerned bond. Moreover, we let the investor know whatshould be his/her required rate of return though we have not been provided sufficientdata regarding the market. Our analysis is specially based on the nature of theinstrument, for which, the investor is going to invest handsome amount money.Different required calculations are shown in the analysis to make it more authentic andreliable. The analysis will be successful if it can serve the purpose of the investors i.e.not only to secure the optimum return but also to understand the reasons behind thedecisions and their proper implementation in practical field.
 
 
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Client Profile Case to be resolved
 
Name
: Annie Hegg
Profession:
Student(Major: Finance)
Annie Hegg has been considering investing in the bonds of Atilier Industries. The bonds wereissued 5 years ago at their $1000 per value and have exactly 25 years remaining until they mature.They have an 8% coupon interest rate, are convertible into 50 shares of common stock, and can be
called any time at $1080.the bond is rated Aa by Moody’s. Atilier Industries, a manufacturer of
sporting goods, recently acquired a small athletic-wear company that was in financial distress. As
a result of the acquisition, Moody’s and other rating agencies are considering a rating change for
Atilier bonds. Recent economic data suggest that the inflation, currently at 5% annually, is likely toincrease to a 6% annual rate.Annie remains interested in the Atilier bond is concerned about inflation, a potential ratingchange, and maturity risk. In order to get a feel for the potential impact of these factors on thebond value, she decided to apply the valuation techniques she learned in her financial course.Requireda. If price of the common stock into which the bond is convertible rises to $30 per share after 5years and the issuer calls the bonds at $1080, should Annie let the bond be called away from hershould she convert it into common stock?
b. For each of the following required returns, calculate the bond’s value, assuming annual interest.
Indicate whether the bond will sell at a discount, at a premium or at par value.1) Required return is 6%2) Required return is 8%3) Required return is 10%c. Repeat the calculation in part b, assuming that interest is paid semiannually and that thesemiannual required returns are one-half of those shown. Compare and discuss differencesbetween the bond values for each required return calculated here and in part b under the annualversus semiannual payment assumption.d. If Annie strongly believes that inflation will rise by 1% during the next 6 months, what is themost she should pay for the bond, assuming annual interest?
e. If the Atilier bonds are down rated by Moody’s from Aa to A, and if such a rating change will
result in an increase in the required return from 8% to 8.75%, what impact will this have on thebond value, assuming annual interest?f. If Annie buys the bond today at its $1000 per value and holds it for exactly 3 years, at whichtime the required return is 7%, how much of a gain or loss will she experience in the value of thebond (ignoring interest already received and semiannual interest)?g. Rework part f, assuming that Annie holds the bond for 10 years and sells it when the required
return is 7%. Compare your finding to that in part f, and comment on the bond’s maturity risk.
 h. Assume that Annie buys the bond at its current closing price of 98.38 and holds it untilmaturity. What will her yield to maturity (YTM) be assuming annual interest?i. After evaluating all of the issues rose above, what recommendation would you give Annie withregard to her proposed investment in the Atilier Industries bonds?
 
 
2
 
Investing concern:
Atilier Industries
Investment instrument:
Bond
Nature of the investment instrument
: Debtsecured or unsecured
First came in the market:
5 years ago
Remaining life time:
25 years
Coupon interest rate:
8%
Call-on price:
$ 1080
Conversion rate:
50 shares per bond
Rating of the bond:
 
Aa by Moody’s.
 
Merger with:
A small athletic-wear company
Special information:
The rating of thecompany Is going to be changed since Moody& other rating agencies have already startedworking.
Existing Inflation rate:
5%
Possible change in the inflation rate:
+1%
Related risk identified:
1. Inflation2. A potential ratingchange3. maturity risk
Special feature:
Call-on option, convertiblebond

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