Case Study 3

Each student is assigned a company, an amount of debt to be raised, a coupon rate and a different maturity. Find your company in the attached excel file.

Your company is considering to issue $X amount of i % annual coupon bond with a n-year maturity. The firm anticipates an increase in its bond rating. Your boss wants you to determine the gain in the proceeds of the new issue if the issue is rated above the current company’s bond rating. You will need to find the current rating of your company and the yield curve for this rating. To find the appropriate yield curve to use for your company you will need first to find the current US nominal Treasury yield curve (at www.treas.gov) and the Credit spread for your company. Follow the following steps:

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1. Find the US Treasury Yield Curve and download it to excel

2. Find the current yield spreads for the various bond ratings. (you can use old ones or pay a fee to get the current ones at www.bondsonline.com or find another website that provides them for free. Show your ability to surf the Web. Download them to excel.

3. Find the current bond ting for your company (use either www.standardandpoors.com or at www.moodys.com/credit-ratings or at www.fitchratings.com) or other websites to find this information

4. Use the information about the credit rating and the credit spread (add the yield spread to the Treasury Spread) and graph on excel the Treasury yield curve as well as the yield curve that gives the spot rates for your company’s debt for different maturities.

5. In a new excel sheet, create a timeline with the cash flows to be paid periodically to the bond holders. Use the spot rates to calculate present value of the cashflow stream and compute the issuing price of your company’s bonds as we learned in bond valuation.

6. Calculate the issuing price if your company’s credit rating improves by one level.

7. Calculate the YTM with the current rating and the YTM with the improved rating.

8. How much additional Cash can the company raise from the issue if the rating were improved

Should corporations work on improving their debt rating?
Every student have different amount to be raised, interest rate, and maturity. In this case my values are:

Amount to be raised: 111,000,000
Interest rate: 10%
Maturity: 16

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