Question

Part a. In Feb’2018, Amazon raised US$3.5bn by issuing 10-year bonds carrying annual coupon of 3.15%. Amazon could also have raised the same amount of funds from the equity market. What benefits does Amazon get by raising funds via bonds that they would not have received by issuing equity? Why do you think the company did not take a bank loan for the total amount raised?
Part b In Feb’2018, Amazon raised US$3.5bn by issuing 10-year bonds carrying annual coupon of 3.15%. The face value of the bond is $1000 and the coupon is paid every six months.
i. If the bond yield at the time of issue was 3.5%, what would be the price of the bond at the time of issue?
ii. If the bond yield at the time of issue was 3.0%, what would be the price of the bond at the time of issue?
iii. It is said that the price of a bond is inversely proportional to the prevailing interest rates. Prove this statement by taking the case of the above bond and computing the price of the bond at the above two yields (3.0%, and 3.5%) for different times from maturity. You may compute the bond prices at 5 years, 2 years, 1 year, and at maturity.
iv. What would be the price of the bond immediately before the payment of the final coupon (compute for both bond yields)?
v. What would be the price of the bond immediately after the payment of the final coupon (compute for both bond yields)?
Part c: Note down price of FaceBook Inc. dated 1st November, and then note down price of FaceBook dated 28th Feb. Calculate holding period return for FaceBook for given time period.
Now research internet to get risk-free rate of return, market return and beta for FaceBook. Appropriately refer all information and give reasons for selecting this data. Then calculate value of value of FaceBook using CAPM Model.

Answer 1

We can solve the required results as follows:

A i) Benefits of raising funds by issuing bonds that they would not have received by issuing equity are that the company has to bear less expense on issuing bonds than on issuing equity. A company usually has to carry out a large number of procedures and follow all the measures that are required to the stock exchange market which is a very expensive.

On the other hand raising bonds doesn't require any such formalities which makes it less expensive therefore companies prefer to raise funds through debt rather than through equity. Moreover there is no ownership split by issue of bonds but in case of equity issue the shareholders are considered the owners of the company and therefore would have control in the affairs of the company

A ii) Company has following advantages of issuing bonds rather than borrowing the funds from bank :

a) Bonds can be structured according to the requirement of company

b) Bonds have different maturities as per the need of the company and is paid in full at the time of maturity.

c) Bonds are usually issued at a interest/Coupon rate which is less than that of the bank loan, which enables the company to pay less interest/coupon payment.

d) No requirement of any collateral security which can be required if large amount of funds are to be raised through bank loan.

B) We can calculate the price of the bond as follows

Par Value (fv) = $ 1,000

Period semiannully (nper) = 10*2 = 20

Coupon rate = 3.15%

Coupon payment (semi annually) = (1000 * 3.15%) / 2

= $ (31.50 / 2 )

= $ 15.75

i) When Yield Annually (rate) = 3.50% then the Price of the bonds is $ 726.41

ii) Yield Annually (rate) = 3.00% then the Price of the bonds is $ 788.00

Formulas used in excel sheet are:

As there are multiple questions asked, I have solved the first 4 parts. Please post the question separately for rest parts to be answered. Hope it helps you !!