Vanilla Bonds
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:
1000 Par
72.5 Payment
19 NPER
0.0588 YTM
($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:
1000 Par
48 Payment
29 NPER
0.0451 YTM
($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
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:
1000 Par
72.5 Payment
19 NPER
0.0588 YTM
($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:
1000 Par
48 Payment
29 NPER
0.0451 YTM
($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
References: Intel Bond Information, Morningstar.com home page Retrieved on March 20, 2012 from http://quicktake.morningstar.com/stocknet/bonds.aspx?symbol=swy Safeway Bond Information, Morningstar.com home page Retrieved on March 20, 2012 from http://quicktake.morningstar.com/stocknet/bonds.aspx?symbol=intc Galloway, T. (2012) Fin 390 1201B Task Description, CTU online.edu home page Retrieved on March 20, 2012 from It’s 4 am and my brain refuses to do this any longer! Safeway, Inc Historical Data, Yahoo Finance home page Retrieved on March 28, 2012 from