Question

1. Why does Target Corporation issue debt?

2. When was the last time Target Corporation issued debt?

3. What was the specific reason (provide evidence) that Target Corporation needed to raise funds?

4. How much did Target Corporation issue?

5. As a potential investor, would you invest in Target Corporation bonds? Why or why not?

6. With interest rates potentially increase, what do you think will happen to existing bonds? And how will Target Corporation react to increased interest rates?

Answer 1

1. Target Corporation issue debt to meet its obligations towards operating leases of its stores and to fund its expansion plans. The company also needs debt to fund its operations and make capital investments.

2. The last time that Target Corporation issued debt was in the financial year 2017 when the company issued long term debt to the tune of $750 million. Specifically the company had issued unsecured fixed rate debt in October 2017 bearing an interest rate of 3.9% and having maturity date of November 2047.

3. The specific reason for which Target raised funds was to fund its operations and to make capital investments for the purpose of expanding its operations in the future.

The evidence for this can be found in Target’s 2017 annual report. The same can be accessed at file:///C:/Users/user/Downloads/2017%20Annual%20Report.pdf

4. Target Corporation issued $750 million of long term debt in 2017.

5. Yes, as a potential investor I will invest in Target Corporation bonds. Target’s bonds currently yield around 3.5% and this is higher than 30 year treasury yield of 2.5%, 10 year treasury yield of 1.75% and S&P 500 yield of 2.08%. Also the long run default probability of Target bonds is very low, on a relative basis.

6. With increase in interest rates the existing bonds of Target Corporation will become less attractive for investors. This is because investors will look to park their investments in instruments that are offering higher interest rates. This will lead to a decline in demand for Target’s bonds and as a result its prices will fall in the market.

Target Corporation will react to increased interest rates by offering their bonds at a discount so as to make it attractive for new investors.