BUSFIN1328
Capital Markets
Duration of Assignment: 1 weeks
INSTRUCTIONS:
1. This case assignment comprises3 pages and7 questions. The case is10 pages in total.
2. The total is50 points. No correction factor will be applied to incorrect answers. Questions not attempted will receive zero marks.
3. On the case-assignment paper remember to fill in your Group number.
4. THE CASE ASSIGNMENTMUST BE SUBMITTED ON CANVAS BY 10.30 AM ON February 27.
5. Questions are to be answered on the paper provided. In addition, where appropriate, you may choose to attach printouts of excel calculations.
6. Any textbook material can be used to facilitate work on the case.
7. ANY calculator or Excel may be used.
8. Indicate which answer goes with which question. Work carefully and be sure to set up your answers so they are easy to follow. Write as neatly as possible.
9. You may type in your answers in the word file copy of the case assignment.
10. While working on the case pleaserely only on the information available in the case.
SYNOPSIS:
An up-and-coming staffer at a small family foundation was considering whether to recommend a corporate bond investment to the foundation’s investment committee. Her exploration was inspired by an article inU.S. News and World Report that identified some attractive corporate bond investments, and she was examining the merits of specific bond issues from Allegiant Travel, GameStop, and Western Union.
1. (5 points) What are the yields on maturity (YTM) on the three bonds? Please provide your calculations/inputs in addition to answers.
2. (10 points) Assuming the reported credit rating are correct and that the market yields for those ratings are appropriate expected returns (benchmarks) for the bonds, quantify the effectiveness of the bonds in two ways: How does the yield of each bond compare to the benchmark yield? How does the current price compare to the benchmark-yield implied price? Please assess the bond prices relative to their benchmark-yield implied prices both in levels ($) and in proportional mispricing terms (%). You may choose to present the analysis for each bond separately or organize it into a table with three bonds together.
3. (10 points) Janet O’Brien suggests that the bond ratings are incorrect. Assuming that O’Brien’s alternative ratings (a full category improvement) are correct and that the market yields for those ratings are appropriate expected returns for the bonds, once again quantify the attractiveness of the bonds in two ways: How does the yield of each bond compare to the benchmark yield? How does the current price compare to the benchmark-yield implied price?
4. (10 points) Explore how sensitive the two longest-term bond prices are to the assumed YTMs. Which bond has higher interest rate sensitivity (you can utilize duration to address this question)? Why?
5. (5 points) Assuming that the reported ratings are correct, what should Janet O’Brien recommend to the investment committee? Why?
6. (5 points) Assuming that O’Brien’s alternative ratings (a full category improvement) are correct, what should her recommendation to the committee be? Please rank bonds by their attractiveness from the most attractive to the least attractive.
7. (5 points) Assuming that O’Brien’s alternative ratings (a full category improvement) are correct, and the Foundation can commit limited capitalto only one bond, what bond Janet should recommend to the committee? Why?