Tombstones - Debt, Money Instruments and Markets

Debt, Money Instruments and Markets

Case: Tombstones

MSFT Notes

A .Why is MSFT raising money?

    According to the case, the raised money will be used for "general corporate finance, which includes funding for work capital, capital expenditure, repurchases of stock and acquisitions". At this time, the Treasury bonds have a relatively low interests, so MSFT can issue bonds with a rate that just a little higher than Treasury bonds and raise money at a low cost. What's more, the increasing debt also takes advantage of the tax shield. With more interest payment, MSFT will pay less tax in total.

B .Is the paper really cheap?  What is YTM for each issue?

    These four bonds are really cheap, because in September 2010 the U.S. Treasury only offered near zero yield short-term bonds and 4% yield 30-year bonds, while MSFT offered higher yield bonds than the Treasury bonds. The YTM are listed as follows:

•  2013 Notes YTM= 0.93%
•  2015 Notes YTM= 1.72%
• 2020 Notes YTM= 3.10%
• 2040 Notes YTM= 4.57%

C . Why YTM differs from coupon rate? What should we compare YTM with?

    The money in the future will not be the same value as the present because of the inflation. What's more, the bond is also sold at a discounted price. Therefore, the coupon rate is not the same as YTM. Normally, we can compare the YTM with coupon rate. If the YTM is higher than the coupon rate, the bond is a discount bond which means the bond is sold more than its par value. If the YTM is lower than the coupon rate, the bond is the premium bond. If the YTM equals to coupon rate, the bond is par bond.

D . Why did MSFT issue four papers instead of one?

    The four papers have four different maturity dates. It can avoid potential financial risk. If MSFT only issues one paper. When the bond comes to the maturity date, MSFT may not have enough money to pay so much money to the borrowers. If MSFT issue four different maturity dates bonds, it's much smoother for the MSFT to pay back money than only issuing one bond. Also, four different bonds can satisfy different kinds of customers so that bonds can be sold easily.

E.  Do you expect that those notes will be called or redeemed

    We think the bond will be redeemed in the future. The MSFT will call bonds back if they predict that the interest rate goes down. When the interest rate goes down, the MSFT can issue new bonds with a lower interest rate. The issued bonds created a high debt to MSFT. Therefore, MSFT may also call the bonds to reduce debt and make the financial report looks good.

                                            Coca-Cola Enterprise Notes

A .What is YTM for CCE issue?