Professional Documents
Culture Documents
YTM of Bonds
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
US-08 GE-Capital Motorola Trump Atlantic City
GMP-2020
Since, Motorola had BBB+ rating, which was above BBB rating which further meant that they had
tolerable protection but couldn’t have the assurance that they could control the and protect the cash flow
if the situation got adverse. Therefore, the default risk was low for Motorola bond. While comparing the
same with Trump which was a very highly vulnerable for investment, had the worst chance to return the
payment. The chances of getting back the principal from Trump bond was very speculative. However,
considering the requirement of Green Hills, i.e. safe return, the consideration of Trump bond could be
eliminated straightaway.
Another factor that attracts the bond more was the bond duration. It provides the insight of the bond that
how much time it takes to repay the principal value by internal cash flows. Investors consider that the
bonds having higher duration, have higher risk and also have higher price volatility than the bonds of
lower duration. Therefore, it reflects in the coupon rate. Bonds with higher coupon rate have lower
duration while bonds with lower coupon rate have higher duration.
While analyzing, it was identified that the cash flow duration for GE Capital and Motorola was almost
equal which suggested that the internet sensitivity of both bonds was also nearly equal.
The convexity of these four bonds had been analyzed to identify the impact of interest rate on the bonds.
While analyzing the convexity, it was found that the Trump bond had negative convexity which meant
that with fluctuations in the interest rate the bond value does not change much. The convexity of GE
Capital and Motorola were found to be nearly equal, which indicated that they were similarly sensitive to
this parameter and hence could not be separated based on this.
So, summarizing the whole analysis, it was concluded that, the Trump Atlantic City could not be
suggested for investment as it had high risk and did not fit to the interest of Green Hills. On the other side,
though the Atlas investor had witnessed Green Hills for selecting T-note bonds 8 times out of 10 times,
but because the bond did not have the high return rate as expected by the Green Hills, this bond also had
been eliminated. For US-08 bond, the bond was rated one of the highest rating and had lowest risk also.
But because of lowest investment return rate, low coupon rate and higher maturity period would lead to
elimination from the shorting panel for Green Hills. Now, from GE Capital and Motorola, these bonds
had almost similar bond duration and complexity but had different coupon rate and yield to maturity also.
Motorola had higher YTM than the GE Capital. It had double YTM that of GE Capital. The bond was
also rated in good rating i.e. BBB+ which reflected that it would provide adequate default protection also.
Hence, Motorola would be good option for Green Hills as per their expectation and criteria.
GMP-2020