Begin by finding the current us treasury yield curve i


  1. Begin by finding the current U.S. Treasury yield curve. I will give you the Treasury data; so you do not need to find it.
  2. Find the current yield spreads for the various bond ratings. Unfortunately, the current spreads are available only for a fee, so we will use old ones from March 28, 2014. I have gone to BondsOnline (www.bondsonline.com) and clicked "Today's Market." Next, I clicked "Corporate Bond Spreads." I have downloaded this table to Excel and copied it both below and to the excel spread sheet that I have given you.  (We will work this problem with the spreads as of 3/28/14.)
  3. Find the current bond rating for Ford. Go to Standard & Poor's Web site (www.standardandpoors.com). Select "Find a Rating" from the list at the left of the page, then select "Credit Ratings Search." At this point, you will have to register (it's free). Next, you will be able to search by Organization Name-enter Ford Motor Company (ticker symbol F). Use the credit rating for the organization, not the specific issue ratings.This you will need to do.          When I looked, there were ST and LT (use LT in local currency). (The rating that I found was for a LT bond issued September 6, 2013.) If you cannot find the rating, send your professor an email so that she/he can give it to you.
  4. Return to Excel and create a timeline with the discount rates you will need to value the new bond issue.
    1. To create the required rate for Ford's issue, add the appropriate spread to the Treasury yield of the same maturity (i.e., ten years). However, note that the spread is in basis points, which are 1/100th of a percentage point. (So you must multiply each of the spread numbers by .01 to add them to the Treasury rates which are in row 22 of the excel spread sheet (and the last line of the table in this exercise).
  5. Compute the issue price of the bond, assuming that the bond is issued with semi-annual coupons (using as its initial yield to maturity the rate that you calculated for the ten-year corporate bond). You will be calculating the cash proceeds that could be raised from the issue.
  6. Repeat steps 4 and 5 based on the assumption that Ford is able to raise its bond rating by one level. Compute the new yield based on the higher rating and the new bond price that would result.
  7. Compute the additional cash proceeds that could be raised from the issue if the rating were improved.
  8. In class we will look at valuing the bond if it were issued with different coupon rates and different maturities (using the data from the excel table). We will also calculate yield to maturity, yield to call and coupon payment in class.  We also will look at the current Treasury yield curve and obtain what would be the rate on a ten-year Ford bond, using the spreads of March 28, 2014, but the yields as of Friday, October 9 (the Friday close before our class). Go to https://online.wsj.com/mdc/public/page/mdc_bonds.html over the weekend to obtain the yield on the ten-year Treasury.  Please bring this excel spread sheet to class and have your computer open to excel during our synchronous session.

Reuters Corporate Spreads for Industrials











3/28/2014














1

2

  3

4

5

6

7

8

9

10


30

Rating

1 yr

2 yr

3 yr


5 yr


7 yr



10 yr


30 yr

Aaa/AAA

5

8

12


18


28



42


65

Aa1/AA+

10

18

25


34


42



54


77

Aa2/AA

14

29

38


50


57



65


89

Aa3/AA-

19

34

43


54


61



69


92

A1/A+

23

39

47


58


65



72


95

A2/A

24

39

49


61


69



77


103

A3/A-

32

49

59


72


80



89


117

Baa1/BBB+

38

61

75


92


103



115


151

Baa2/BBB

47

75

89


107


119



132


170

Baa3/BBB-

83

108

122


140


152



165


204

Ba1/BB+

157

182

198


217


232



248


286

Ba2/BB

231

256

274


295


312



330


367

Ba3/BB-

305

330

350


372


392



413


449

B1/B+

378

404

426


450


472



495


530

B2/B

452

478

502


527


552



578


612

B3/B-

526

552

578


604


632



660


693

Caa/CCC+

600

626

653


682


712



743


775

US Treasury Yield

0.13

0.45

0.93


1.74


2.31



2.74


3.55

Solution Preview :

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Financial Accounting: Begin by finding the current us treasury yield curve i
Reference No:- TGS01133715

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