Bond Value

 

 

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Case: Roche Holding AG: Funding the Genentech Acquisition (# UV5641)

Required Background Materials: None

Recommended Background Materials: Ch 3, of BMA “Valuing Bonds”; Ch 4, of BMA “An
Overview of Corporate Financing”

Learning Goal(s): Examine how to price/value corporate bonds. Practice bond analytics
through computing YTM. Understand bond ratings and credit spreads. Gain insights into the
tradeoff between risk and return and introduce the concept of cost of debt.

The case set in 2008 describes the potential bond issue from Swiss pharmaceutical company
Roche Holding AG. The firm needs to raise $32 billion from bond issuances in order to pay for
its acquisition of the remaining shares of Genentech. Roche management plans to issue bonds at
various maturities (from 1 to 30 years) and in three different currencies (US dollar, Euro, and
British Pound). The financial markets have been in steep decline as the US real estate bubble
burst and a massive worldwide recession begins. Roche wants to issue their bonds at par which
means that the coupon rate needs to equal the yield to maturity (YTM) that investors require.
The critical question is what rate will investors require on their bonds?

The case allows us to introduce the tradeoff between risk and return and examine how to
quantify it with respect to bonds. The case allows for discussion regarding bond ratings, credit
spreads, and bond pricing. The case requires a good understanding of bond analytics (computing
YTM) and the use of comparable bonds to estimate likely yield.

MAIN DISCUSSION QUESTION:
What coupon rate should Roche offer for its bonds so that they can be sold at
par?

Answering the questions below should help you in addressing our main discussion question:

1. Do you agree with the timing of the bond offering? Is it a `good time’ to issue?
2. Do you anticipate that the offering will affect Roche’s bond rating? If so, in what way?
3. How can we estimate the yield investors will require on a bond? What are your estimates of
investors’ required yields for the 5-year, 10-year, and 30-year US dollar bonds?
a. First estimate the yields for the Roche bonds using the information in Exhibit 6.
b. Next estimate yields based on information in Exhibit 11 (you can assume all bonds
have a par value of $100).
c. Which estimate do you trust more? Why? How would you explain to someone
unfamiliar with credit markets why these estimation techniques are valid?
4. What is your estimate of investors’ required yields for the 7-year Euro denominated bond?
Can you just use the same techniques as you did in Question 3?

 

Sample Solution

Bond valuation is a method for calculating a bond’s theoretical fair market value. Calculating the present value of a bond’s future interest payments, also known as cash flow, and the bond’s value at maturity, also known as face value or par value, are both part of bond valuation. An investor uses bond valuation to calculate what rate of return is required for a bond investment to be worthwhile because the par value and interest payments are fixed. A bond is a debt product that pays the investor a regular income stream in the form of coupon payments. The bondholder receives the full face value of the bond when it matures. A normal bond has the following characteristics:

 

My Earliest Memory

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First recollections of oneself can be effortlessly mistaken for manufactured recollections made by seeing old pictures, films, and hearing stories identified with one’s very own history. This is the situation for me: I have seen such a significant number of home films, heard such huge numbers of tales about myself, and seen such a significant number of pictures about my youth, I don’t know for certain what my first memory is in reality. Since I can’t pinpoint my first memory precisely, I will unfurl a progression of recollections that were the most punctual in my adolescence.

trees in windI recollect around evening time glancing through the huge glass windows of our front room at the tremendous pine trees and douglas fir trees, which brushed against our white fence. The trees would influence once in a while fiercely in the breeze, as it was basic in Seattle around evening time. I would watch the trees move, accepting to see many alarming and unusual shapes framing in obscurity, as though the trees were alive in a cognizant manner. The trees would move into the kinds of beasts my creative mind conjured up. I would inform my mom concerning the shapes and structures, yet as a typical mother would do, she attempted to quiet me down rather than cooperate with my ghostly obsession.

Another sharp early memory of mine was the point at which I analyzed my body. I was interested, as most kids may be, about the surface and type of the body we are given during childbirth. Since the beginning, I had four activities: two open heart medical procedures, and two hernia medical procedures. I would feel my scars, which scale up my chest and travel close to my crotch as though they were scenes, consumed into my skin until age would blur them away. Other than scars, I would savor over the littlest of points of interest about my eyes, which have hazel lines dashing away from the understudies. I would look at my life state through my eyes: I could perceive how I was all in all through them. My hands were likewise a state of interest for me: my left hand is altogether littler than my correct hand in light of medical procedures. Looking at them was and still is somewhat of a fixation of mine.

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I figured out how to ride a bike very early, however I don’t recollect the specific age. My dad was an expert cyclist at a certain point, and he needed his child to be sharp in the game too. Be that as it may, I recollect my first endeavor to ride a bike without preparing wheels finishing shockingly and entertainingly. Out on the central avenue alongside our home, where there were basically no vehicles driving around in those days because of less populace, I began OK on a little kid bicycle. My equalization was fine from the beginning, however then I got overexcited and lost my parity, in the long run crushing into our post box. In spite of the fact that my father was worried about my wellbeing from the start, after he saw that nothing genuine had transpired, he chuckled decisively and was making jokes about me. I didn’t feel disheartened—actually, I was snickering along following a couple of moments.

I have a lot progressively dispersed recollections that could consider first recollections, despite the fact that they are blended in with my impressions from watching home films, seeing pictures, and hearing anecdotes about my adolescence. We may not know our first memory for certain, yet once we attempt to uncover it, the world we lived in as a youngster pours through the perspective of visual idea, bringing back the air of this time into the present minute, similar to an incense smoke that delicately twists around our present detects.

exposition about existence, article design, chronicled essa

 

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