3/19/2022 Written Case

Analysis

Submitted By-
BJ21124 | Adarsh Nethwewala
BJ21136 | Chinmayi Lanka
BJ21150 | Mohak Khare
BJ21157 | Pallavi Mehrotra
BJ21177 | Utkarsh Gupta
CASE BACKGROUND
Atlas Investment Management, an investment advisory firm, follow the working style of
ensuring a recommendation is available for the client before they conclude the meetings. The
team of analysts was led by John Galt. Their clientele includes the $600 million worth of
endowment fund of Green Hills, a golf club.
As none of the members of the club hold a specialization in the field of finance, the follow a
simple operating procedure in terms of investment, wherein they meet 4 times a year for the
purpose of evaluating the fund’s performance. One of these meetings is after getting
investment advisory from Atlas. Based on the investment criteria and targets provided to Atlas
by Green Hills, they make necessary recommendation for investment.
Trustees at Green Hills are risk averse who undertake investment with caution, their focus
being primarily on preservation of principal amount. However, due to the aggressive rate cuts
undertaken by Fed, Green Hills were inclined for safe bonds which would provide a high yield.
John Galt and his team of analysts came out with four shortlists. The first alternative involved a
choice between two bonds: a 7.875 percent bond that was issued by GE Capital (a subsidiary of
General Electric), or a 7.6 percent bond which was issued by Motorola. These bonds were
investment grade and had a five-year maturity date. The third suggestion from Roger was the
11.25 percent bond of Trump Atlantic City which was graded CC by Standard and Poor with a
maturity of 4.5 years from maturity. A 3.625 percent Treasury note with a maturity of 6 years
was provided by Brian on the grounds that the trustees if Green Hill selected eight treasury
bonds out of the last ten recommendations.
During this discussion, Galt’s secretary informed him that Fred Taylor was wanting to invest an
additional $1 billion within the next 1.5 hours.
We must arrive at an appropriate investment alternative based on different parameters such as
default risk, interest rate risk, yield to maturity etc.

PROBLEM STATEMENT
To make a recommendation for an investment plan to Green Hills for Taylor’s USD 1 billion by
identifying which safe bonds result in the highest yield to Green Hills.

ALTERNATIVES
The options available for investment are as follows:
I. GE Capital: 5-year maturity, Coupon rate 7.875%, AAA rated.
II. Trump Atlantic City: 4.5-year maturity, Coupon rate 11.25%, CC rated.
 III. Motorola: 5-year maturity, Coupon rate 7.6%, BBB+ rated
IV. T Note: 6-year maturity, Coupon rate 3.3625%, AAA rated.

CRITERIA FOR EVALUATION

 Yield to Maturity: This is the expected rate of return of a bond if it is retained till
maturity. The term YTM refers to a long-term bond yield expressed as an annual
average. The actual selling price, par value, coupon interest rate, and time to maturity
are all considered when calculating YTM. Moreover, all coupons are assumed to have
been reinvested at the same cost.
 Duration: Duration will tell us how long the bond takes to recover its true cost. Through
Macaulay Duration, we estimate the number of years that is required to recover the
true cost of the bond considering both the coupon and principal payments received in
the future. Modified Duration also considers the interest rate changes as this affect
duration as yield changes each time interest rate changes.
 Investment Credit Rating: Rating agencies such as S&P assign grades to bonds based on
a various factor which includes the default risk, the financial state of the company, etc.
The better the grade of a bond, the safer it is for the holder.
 Frequency of coupon payments: A higher frequency would be beneficial in terms of
working capital management. However, since all our bonds have semi-annual coupon
payments, frequency would not be considered in this case.
 Liquidity: A high liquidity makes the bond much more attractive. Liquidity implies how
easily/readily the bonds can be sold in the secondary market. In the case being
discussed, there no discussion with respect to liquidity.

EVALUATION AND ANALYSIS

Green Hills Golf Club desired a bond with a high yield and a low risk. The defined bonds were
evaluated as follows:
 GE Capital: With an investment rating of AAA, the yield on the bond is 2.47%. Thus, in
terms of risk, the bond is equivalent to the treasury note, but it has a 2% higher yield.
However, we also get a higher duration as compared to T-bills.
 Motorola: The bond's yield is 3.38%, but the investment rating is BBB+. It is marginally
riskier than AAA bonds, but it is also a decent bond with a higher yield. However, in
times of economic crisis, bond payments can be delayed.
 Trump Atlantic City: The bond has the highest yield of the options offered. The biggest
thing is that it is graded CC, which is a non-investment, junk grade ranking. Provided
that Green Hills has always been cautious, it is not a bond that can be recommended for
large corpus to them because it is more prone to non- payment.
  T-Note (US-08): T-annual Note's yield was estimated to be 1.71%. It has an investment
rating of AAA, making it one of the safest bonds. However, the yield is not very high, and
therefore it is not the best choice given the Green Hills Club's requirements.

 Alternative I II III IV
Issuer GE Capital Motorola Trump Atlantic US-08
City
Issue Date Dec 1991 Jan 1992 May 1996 Jan 1998
Expiry Date Jan 2007 Jan 2007 June 2006 Jan 2008
Years to Maturity 5 5 4.5 6
Coupon Rate 7.875% 7.60% 11.25% 3.625%
Frequency of Coupon Payment 2 2 2 2
Credit Rating AAA BBB+ CC AAA
Face Value $100 $100 $100 $100
Price $112.799 $103.455 $62.75 $101.06
Yield 2.477% 3.387% 12.841% 1.714%
Macaulay Duration 10.19 10.14 5.44 8.55
Modified Duration (in %) 10.06 9.97 5.11 8.47

RECOMMENDATIONS
The Trump bonds seem the most favourable due to their high return, however, the junk rating
makes them risky, even though they have the lowest modified duration, that indicates their
reduced sensitivity to the interest rates, which is desirable in the climate that the firm is
operating in - where the Fed is cutting rates incessantly. We have capped our investment in
such bonds to 25% to take benefit of the high returns and yet reduce the exposure.
The remaining 75%, we have split between Motorola (25%) and GE Capital (50%). Both are
investment grade. We have kept the split heavy on GE as the firm has historically largely
invested in treasury bonds only, GE offers better returns than T-bills, with similar risk profile.
However, the modified duration is highest in GE, which implies that it is very sensitive to
interest rate changes. Hence, we have balanced it with Motorola.