Question

knowing that interest rate risk is highest for very long term bonds some well known corporations including Coca-Cola, Ford Motor Company, IBM and Disney have issued 100 year bonds.

1- explain why these companies would issue 100 year bonds? what are the advantages and disadvantages of issuing 100 year bonds as compared to bonds which have a much shorter maturity date?

2- why would investors purchase bonds with 100 year maturities knowing that they are unlikely to still be living when the bonds pays back its principal? what type of investors would be most interested in this type of bond?

Answer 1

1. One of the reasons the company issue longer maturity bons is they want to lock in the interest rate especially in time of low interest rate environment. Companies raise cash and investors get a continuous stream of interest payments.

Disadvantages:

1. Greater risk that the issuing company will experience financial trouble. The long term bonds usually have higher interest rate than short term bonds. Hence, company have to pay higher coupon interest every year to the investors

2. It is sometime difficult to sell longer maturity bond to investors due to inherent liquidity risk

3. Long maturities bonds have higher interest rate risk as their market prices fluctuate more per given change in market interest rates, than of short-maturity bonds

Advantages:

The company dosent have to worry about repayment of pricipal amount anytime sooner. Hence they can divert the cash flow towards undertaking new projects to create value for shareholders.

2. The major investors for 100yr bonds are institutional investors who have very long term investment horizon (eg - endowment funds or pension funds managers) and want to lengthen the duration of their bond portfolios. Longer bonds allow pension and insurance companies to better match their future liabilities