Case Study
Part I
Suppose Jagdambay manufacturing sells a bond paying a coupon rate of 5% per year with par value (face value) of $200,000 when the market rate is only 4% per year. The bond has 5 years until maturity.
What is the bond’s price today if market rate is 5%? Show your computations
The issuance of bonds is done with a fixed par value and the dividends paid out to preferred stockholders is done on the basis of a percentage of that par value at a fixed rate. The present day bond price is calculated as follows:
Bond Price = c / (1 + i) + c / (1 + i)2 + …+ c / (1 + i)n + M / (1 + i)n
In this case,
C is the coupon payment = $200,000
I is the interest rate = 5 percent
M is the value at maturity = 4 percent
n is the number of payments = 5 (Investopedia, n.d)
Therefore,
Bond Price = 5% × $200,000 × (1 – (1 + 4%)-5) / 4% + $200,000 / (1 + 4%)5
= 0.05 × $200,000 × 4.4518 + 164,385.42
= $44,518 + $164,385.42
= $208,903.41
Part II
1. Would you choose to invest in the Woodside Petroleum Ltd.’s bond as part of your investment portfolio? Why or why not? If so, what sort of strategy would you pursue?
I would choose to make an investment in the bond for Woodside Petroleum Ltd. As part of my investment portfolio. This is for the reason that this particular investment is the most ideal manner of gaining insight into the fast-paced growth of Australia as an international LPG producer. In particular, the product is facing a great deal of demand, especially emanating from the Asian expanses. If Woodside advances and progresses efficaciously with all of its projects, it is expected to generate approximately over 20 million tonnes of LPG every financial year at the turn of the decade. The organization has a great deal of resources and its prevailing trading is done on a price-earnings that is roughly 25 times whereas that of the market at large...
Moreover, Woodside has had great performances and experienced a great deal of success in the preceding financial periods, which makes the bond attractive. Moreover, there has been an incessant increase in the dividend per share of the company. The inference of this is that the corporation purposes to maximize the shareholders’ wealth. It is also imperative to note that the sales revenue generated by the company has been rising in the preceding financial years, which is an indication that the company has a good financial performance and has a great likelihood to have similar or better performances in the forthcoming financial years. Therefore, taking into consideration the financial history as well as its performance in the stock market, it is definitely sensible to invest in the bond (Woodside, 2009).
The main strategy that I would pursue is the laddering strategy. This strategy is selected with the main purpose of portfolio diversification, decrease in price volatility, in addition to spreading out the level of risk in the investment in a variety of prospective interest rate settings. In addition, this strategy is deemed feasible for the reason that it will enhance the general earnings and returns generated from the investment by spreading the maturities of bonds over numerous years (Investopedia, n.d).
2. Based on your analysis and findings, would you recommend the Woodside Petroleum Ltd.’s bonds to other investors? Please explain your reasoning
On the basis of my analysis and findings, I would definitely recommend the Woodside Petroleum Ltd.’s bonds to other investors for investors. The corporation holds an international presence and is deemed to have cutting edge proficiencies and competencies as the oil and gas producer, developer and also retailer. In the recent number of years, Woodside Petroleum has had the capability of raising substantial amounts of money in a short amount of time. This is also impressive taking into consideration that it has been dealing with major projects like Sunshine and Pluto,…
