Walt Disney's Sleeping Beauty Bonds

Walt Disney Company’s Sleeping Beauty Bonds

Theoretical Questions

Answer 1 –

1. Cash Payments = $7.55.
2. When $100 bonds are issued, the issuer (Entity who needs finance) gets $100 at the time of issuance against every single bond issued.
3. Issue date = July 1993.
4. Delivery date = 20th July 1993.
5. The date of first interest payment = 15th July,1994.
6. The date of second interest payment = 15th July 1995.
7. The maturity date = 15th July 2093.

Answer 2 –

No price was given in cell F15. We may suppose the prices to clarify the concepts. If the price was $150.61 (greater than par value), then the interest rate would be 5% (Lesser than coupon rate). If the price was $75.50 (Lesser than the par value), then the interest rate would be 10% (Greater than the coupon rate).

Answer 3 –

1. Interest rates increase when the demand of debts increases in the market. Borrowers are more, but the lenders are a few.
2. New price on 8.55% interest rate = $88.31.

Answer 4 – 

New price on 6.55% interest rate = $115.24.

Answer 5 – 

1. The interest rate is not reasonable for 100 year horizon. As the interest rate would increase from 7.55%, there would be zero PVs closer to maturity. Hence the interest rate must not be more than 7.55%.
2. See excel.

Answer 6 –

1. The price is same because both are providing equal yield. As the coupon rate is 7.55% and interest rate is also 7.55%, bond would be sold at par value i:e $100. As the change in price of the bond is dependent on two factors; interest rate and duration. So, if the interest rate would remain same during the whole period, then the price of the bonds would remain same.
2. If the interest rates would fluctuate wildly, then the price would drop. As the risk will increase and investors would start selling the bonds. This would increase the supply in the market. This would lead to drop in the prices of the bonds.

Answer 7 – 

1. As the interest rate increases, price of the sleeping beauty bond decreases more than the napping beauty. It is because it has more duration due to its greater maturity period. Higher duration leads to more drop in the prices on every percent change in the interest rate. Therefore, Napping beauty bonds are work more as their duration is less due to their shorter maturity period as compared to sleeping beauty’s maturity period.
2. As the interest rate decreases, price of the sleeping beauty bond increase more than napping beauty’s price. It is because it has higher duration due to its greater maturity period. Every percent drops in interest rate increases price of the bond. Increase in price is more for bonds with greater maturity period because it has higher duration. In this case, sleeping beauty bonds are more sensitive to the change in interest rate because it has higher duration.

Answer 8 –