Income statement
For the student’s convenience, the following material has been adapted, with permission, from Walt Disney Company’s Sleeping Beauty Bonds – Duration Analysis, Harvard Business School Case 9-294-083, Rev. July 13, 2000. Copyright © 1994 by the President and Fellows of Harvard College.
1. What are the cash payments associated with the Sleeping Beauties? Who gets how much and when, per $100 of bonds issued?
2. What interest rate was used to calculate the price?
3. Next day, market yield rises 100 bp (1%) from 7.55% to 8.55%. What’s the new price?
Rates fall from 7.55% to 6.55%. What’s the new price?
4. What is the formula for the PV of a single cash flow received n years from today?
Calculate PV of each year’s CF from the Sleeping Beauty bonds.
5. Use the Excel Chart function to create pictures of: The “raw” cash flows from the Sleeping Beauty bond The present value pattern of the bond.
6. Use the NPV function in Excel to calculate the value of the Sleeping Beauties for each of the interest rates shown.
If you didn’t have the NPV/PV function, what formula would you use?
7. Maturity worksheet
Compare the prices of the Sleeping and Napping bonds at the initial interest rate of 7.55%. Why are they the same?
What does this say about the expected price path of the Sleeping Beauties as time passes, if interest rates remain around 7.55%.
Suppose interest rates fluctuate wildly during the next two years and then stabilize again at around 7.55%. What do you predict would happen to the price of each of the bonds?
8. Use the Excel Chart function to create a picture of the PV pattern of the 10-year bond.
9. Compare the value of the Sleeping and Napping bonds for market yields to maturity from 2% to 20%.
For interest rates greater than 7.55%, which is worth more? Why?
Do the same for interest rates lower than 7.55%. Which bond is more sensitive to interest rate fluctuations? Why?
10. Bonds
1. What are the cash payments associated with the Sleeping Beauties? Who gets how much and when, per $100 of bonds issued?
2. What interest rate was used to calculate the price?
3. Next day, market yield rises 100 bp (1%) from 7.55% to 8.55%. What’s the new price?
Rates fall from 7.55% to 6.55%. What’s the new price?
4. What is the formula for the PV of a single cash flow received n years from today?
Calculate PV of each year’s CF from the Sleeping Beauty bonds.
5. Use the Excel Chart function to create pictures of: The “raw” cash flows from the Sleeping Beauty bond The present value pattern of the bond.
6. Use the NPV function in Excel to calculate the value of the Sleeping Beauties for each of the interest rates shown.
If you didn’t have the NPV/PV function, what formula would you use?
7. Maturity worksheet
Compare the prices of the Sleeping and Napping bonds at the initial interest rate of 7.55%. Why are they the same?
What does this say about the expected price path of the Sleeping Beauties as time passes, if interest rates remain around 7.55%.
Suppose interest rates fluctuate wildly during the next two years and then stabilize again at around 7.55%. What do you predict would happen to the price of each of the bonds?
8. Use the Excel Chart function to create a picture of the PV pattern of the 10-year bond.
9. Compare the value of the Sleeping and Napping bonds for market yields to maturity from 2% to 20%.
For interest rates greater than 7.55%, which is worth more? Why?
Do the same for interest rates lower than 7.55%. Which bond is more sensitive to interest rate fluctuations? Why?
10. Bonds