Case Scenario: Bond Questions
Question 1: On 3 March 2015, Jaguar Land Rover Automobile Plc (JLR), the wholly owned car manufacturing subsidiary of Indian company Tata Motors Ltd had issued US$500 million of senior notes (bonds) at par value bearing a coupon rate of 3.5% p.a payable on a semi-annual basis and the bond is expected to mature in 2020. The consideration will be used to buy back a $410million bond issued on 19 May 2011 and was due to mature in May 2021 with a coupon rate of 8.125% p.a payable on semi-annual basis. In March 2015, the 2021 bond was bought back at a premium of 11% over the par value.
(i) Determine the market value of the bond bought back.
(ii) After constructing the bond payments on Excel worksheet, determine the annualised yield to call of the $410 million bond.
(iii) Determine the present value of the cost savings for Jaguar in refinancing its bond.
Question 2: Corning's convertible bond
On 8 November 2000, Corning Inc, the US-based company manufacturing ceramics, materials and glasses since 1851, issued a $2.7bn zero-coupon convertible bonds priced at $741.923 per $1000 par value and maturing on 8 November 2015. The buyers of the convertible bond have the option to convert the bond at any time before expiry and total bond issue is convertible into 53 million shares. At the issue date of the convertible bond, the share price was $50.35 and the share prices on 1 November every year from 2000 to 2015 are displayed below:
|
Date
|
Close
|
Date
|
Close
|
|
1/11/2015
|
18.73
|
1/11/2007
|
24.29
|
|
1/11/2014
|
21.02
|
1/11/2006
|
21.56
|
|
1/11/2013
|
17.08
|
1/11/2005
|
20.25
|
|
1/11/2012
|
12.23
|
1/11/2004
|
12.58
|
|
1/11/2011
|
13.27
|
1/11/2003
|
11.47
|
|
1/11/2010
|
17.66
|
1/11/2002
|
4.43
|
|
1/11/2009
|
16.68
|
1/11/2001
|
9.43
|
|
1/11/2008
|
9.01
|
1/11/2000
|
58.50
|
1. Determine the yield to maturity of zero-coupon bond
2. Determine the value of embedded option on issue date and on 8 November 2014.
3. Determine the market value of the zero-convertible bond on 8 November 2014.
4. Was convertible bond an effective strategy for Corning Inc?
5. If an investor buys $7.41923m of the above convertible bond and short sell the shares on 8 November 2000, determine the gain or loss on convertible bond arbitrage.