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In: Finance

As you realize corporations issue long-term debt in the form of bonds all the time. In...

As you realize corporations issue long-term debt in the form of bonds all the time. In Chapter Three we are told that there are different characteristics of these bonds that affect their yields. Given the following bond listing for Ford Motor Credit Company, list and explain the debt characteristics (Credit (default) risk, Liquidity, Tax Status, Term to maturity, Call feature, Conversion feature) as they relate to this bond and if they are adding or subtracting from the yield on this bond. There is a copy of Moody’s recent report on the Ford Motor Credit Company’s Bond that will help you with your answers.

Ford Motor Credit Company OVERVIEW

Price: $99.350 per $100 of par value

Coupon (%): 4.903%

Maturity Date: 20-Aug-2023

Yield to Maturity (%): 4.395

Current Yield (%): 4.278

Moody’s Ratings*: Baa2

Coupon Payment Frequency: Semi-Annual First

Coupon Date: 20-Feb-2019

Type: Corporate

Callable: No *

https://research.ameritrade.com/grid/wwws/common/reports/moodyreport.asp?YYY600_SDMuF4C9fhdMSyFm95jfK3MHDKn4rQdNQ7qgwxEiOaKp+TRWk2mcNgIbEGpA88hVRj1yQqvUbMLIXpNav8DLItWr/hANUUDIgc+YYB6vPXQx47ORI2LYfA==&c_name=invest_VENDOR

Expert Solution

Solution:

Ford Motor Credit Company

Price: $99.350 per $100 of par value

Coupon (%): 4.903%

Maturity Date: 20-Aug-2023

Yield to Maturity (%): 4.395

Current Yield (%): 4.278

Moody’s Ratings*: Baa2

Coupon Payment Frequency: Semi-Annual First

Coupon Date: 20-Feb-2019

Type: Corporate

Callable: No *

We can analyse the corporate bond based on various criteria and these are given below

Credit (default) risk: This is the risk that defines whether the bond issuing organization will be able to pay back the face value at maturity or the coupon payment. Various rating agency give credit rating and here in this case Moody's has given the Baa2 rating. Aaa rating means highest grade while C is default. Baa2: It is lower medium grade rating for the investment. So here the default risk is medium
Liquidity: liquidity means how easily you can sell the asset and corporate bonds are less liquid as compared to sovereign bond. If we talk about the liquidity profile of the company then the company has good amount of cash and its liquidity position is good
Tax Status: The investor is liable to pay the federal as well as state income tax on the income earned from

Interest income: Coupon payment
Capital gain: Through selling the bond at higher price

Term to maturity: it refers to the time remaining till maturity. The bond has Maturity date as 20-Aug-2023. If we assume today is 20-Aug-2018 then time to maturity will be 2023- 2018 = 5 years.
Call feature : The bond has no callable option as it is mentioned. The callable option means, bond can be called before maturity date at a specified certain price.
Conversion feature: The conversion feature means bond can be converted to equity in the future but in this case there is no conversion feature available for this bond.

jeff jeffy answered 2 years ago

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