Case 2 - The Walt Disney Company’s ”Sleeping Beauty” Bonds
Why long-term bonds?
Disney Company’s management may speculate that the interest rate will rise in the long run, although the interest rate at that time was very low. Actually this speculation was opposite to the Federal Reserve, who tended to use more short-term debts rather than long-term ones. Based on Disney’s speculation, the company has much incentive to issue long-term bonds to lock a relatively low cost of capital from the market.
Higher yield than 30-year US Treasury bonds
Disney Bond has higher yield than 30-year US Treasury bonds for the following three reasons: First, Disney bond has a payment period for 100 years, with more liquidity risk; Second, since Disney bond is a global securities with higher credit risk compared with US Treasury bonds; Third, Disney’s bond incorporates a call option. Thus, investors require larger yield of this bond.
Face value vs. coupon value
From the perspective of the bondholder, semi-annual coupon payments are more valuable than the final payment of face value in terms of present value. If we use the coupon yield 7.55% as YTM, we could derive that present value for face value is $207,052.17, while present value for coupon payment is $149,999,785.65.
Callable vs. non-callable
a. From the investors’ perspective, the Company’s call option will make the bond less attractive at issuance date, because investors will bear the interest risk when the interest declines in 30 years.
b. Management included a call option because it provided the chance to buy back the bonds and issue new bonds at lower costs, which would benefit the company a lot.
c. Coca-Cola’ s bonds would have a higher yield than Disney’s callable bonds as times goes, because non-callable bond provide more protect to investors and thus more attractive in the market.
Calculation of PV
a.