Case, WorldCom

Case, WorldCom - increasing(hurts us • Spreads are amount...

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Case: WorldCom Inc. Issue: o Raise $4 - $6 billion in debt to acquire MCI for $37 billion o What will cost of this debt capital/ new bonds be? Alternatives: o 4 different bond types (3, 5, 7, 30-year) in a jumbo issue o Smaller issues over time o Bank loans/ debt Criteria: o Lowest yield possible (depends on bond ratings) Market factors: o Over-supply of debt on the market means prices get driven down o Asian crisis: Exhibit 7 shows people are leaving risky investments and flooding safer options like bond market Bond prices go up Yields go down Effect on corporate bonds: Spread shows that even though T-bond yields decline (helps us), spreads are
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Unformatted text preview: increasing (hurts us) • Spreads are amount that corporate yields are higher than treasury yields • Investment bankers notorious for under pricing bonds, so as to not hurt their reputations • To worry about in pricing: o Maturity length o Industry comparables (other WorldCom bonds) o Bond ratings • The riskier the bond, the higher the spread (bad) • Investors are bullish: o Spread will be lower (bull = prices rise) • Investors are bearish: o Spread will be higher (bear = prices fall) • In this case investors were bullish: o WorldCom bonds were priced way too high...
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This note was uploaded on 06/11/2011 for the course BUSI 408 taught by Professor Croce during the Spring '08 term at UNC.

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Case, WorldCom - increasing(hurts us • Spreads are amount...

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