Vanilla Bonds

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  • Topic: Time value of money, Bond, Rate of return
  • Pages : 4 (1318 words )
  • Download(s) : 71
  • Published : May 13, 2012
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James Crowl
Colorado Technical University
FIN390-1201B-03
Phase Five Individual Project
Instructor: Professor Galloway
March 16, 2012

Part One: Vanilla Bonds

Abstract

Understanding how to properly value a vanilla bond is essential for finance (ctuonline.edu). In theory, the present value relationship determines the value of a bond, but in practice the actual price is (typically) determined by suggestions from other, more liquid mechanisms. The purpose of this work will be to research bonds offered by Safeway (SWY), analyze them, and then decide in what situation these bonds would be beneficial for the investor.

More often than not, a company that is successful will have retained some of its earnings. The company may do one of two things: disperse part of the cash out in the form of dividends, or simply hang onto it to create a competitive advantage. Eventually, they realize that the monies could be working for them also. Stocks may carry the lure of a larger return, but that comes with the volatility and risk of the market. Bonds, however, may offer a steady income (larger than dividends) that may be used to provide its investors with consistent revenues. Safeway offers a bond that matures in 2031, with a coupon rate of 7.25% and a discount rate of 5.88%. This will make the payment $72.50. The following calculation reveals the bond price: 1000Par

72.5Payment
19NPER
0.0588YTM
($1,154.31)Value
This bond is currently selling above its face value, which makes it a premium bond. Intel Corporation (INTC) offers a bond that matures in 2041 with a coupon rate of 4.8% and a discount rate of 4.51%. This will make the payment $48. The following calculation reveals the bond price: 1000Par

48Payment
29NPER
0.0451YTM
($1,046.41)Value

Both bonds are selling above the face value, but the Safeway bond is selling for a higher price than is Intel. This makes the Safeway bond a more attractive bond. The bond that matures in less time has...
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