Question

Find and discuss a news story about a large public U.S. corporation (with outstanding bonds) that recently reported an (unexpected) financial loss. How did (or would) the stock market to react to this news? How would you expect the bond market to react to the news? Would this financial loss affect the yield to maturity on the company's outstanding bonds? If so, why and how?

Please cite and include links.

Answer 1

1). We will take a look at G.E (general electric) which reported a loss of $22.8 Billion in 3rd quarter of 2018. This was due to a massive downgrade in assets vale of GE coupled with the fact that the revenues fell by 3.6% when compared to the last quarter. this news was followed by removal of John Flannery, the Ex- CEO of the company and replacing him with CEO Larry Culp. This was followed by a dividend cut from 12 cents to a penny.

2). When the news hit the market, the stock showed a up movement this was due to increased aspirations of the new CEO of the company however following few days it started to loose its market value and the share price plummeted by 25% in November 18. ( on the date of announcement, GE shares fell as much as 2.6 percent before closing 1.9 percent higher.

3). I would expect that because of the trade in secondary markets, the bonds trading price will vary but the variation would be negligible. The variation would be due to the fact that the investors would me selling more bonds than buying.

4 If the credit rating of the company and the market interest rate remains the same, the price of the bond wont change. However in this case, the losses lead to a decline in credit rating as the ratings agency lowered its GE rating to BBB+ from A. This lead to the decrease in the bond price which in turn increased the yield to maturity.

Links: for bond prices- https://markets.businessinsider.com/bonds/8_350-general-electric-capital-bond-2022-xs0319509294

For news article: https://www.cnbc.com/2018/10/02/ge-credit-rating-under-review-for-possible-downgrade-moodys.html