Demand for fords debt was so high that in january the

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: for Ford’s debt was so high that in January the company increased the size of its issue from $5 billion to $7.8 billion, and October’s plan to issue $3 billion turned into a $9.4 billion offering. The world’s second largest auto manufacturer joined other corporate bond issuers to take advantage of strengthening bond markets. Even though the Federal Reserve began cutting shortterm rates, interest rates for the longer maturities remained attractively low for corporations. Unlike some other auto companies who limited the size of their debt offerings, FMCC decided to borrow as much as possible to lock in the very wide spread between its lower borrowing costs and what its auto loans yielded. All this debt came at a price, however. Both major bond-rating agencies—Moody’s Investors Service and Standard & Poor’s (S&P)—downgraded Ford’s debt quality ratings in October 2001. Moody’s lowered Ford’s long-term debt rating by one rating class but did not change FMCC’s quality rating. Ford spokesman Todd Nissen was pleased that Moody’s confirmed the FMCC ratings. “It will help us keep our costs of borrowing down, which benefits Ford Credit and ultimately Ford Motor,” he said. S&P’s outlook for Ford was more negative; the agency cut ratings on all Ford and FMCC debt one rating class. The lower ratings contributed to the higher yields on Ford’s October debt. For example, in April FMCC’s 10-year notes yielded 7.1 percent, about 2 points above U.S. Treasury bonds. In October, 10-year FMCC notes yielded 7.3 percent, or 2.7 points above U.S. Treasury bonds. For corporations like Ford, deciding when to issue debt and selecting the best maturities requires knowledge of interest rate fundamentals, risk premiums, issuance costs, ratings, and similar features of corporate bonds. In this chapter you’ll learn about these important topics and also become acquainted with techniques for valuing bonds. F 263 264 PART 2 Important Financial Concepts LG1 6.1 Interest Rates and Required Returns As noted in Chapter 1, financial institutions and markets create the mechanism through which funds flow between savers...
View Full Document

This document was uploaded on 01/19/2014.

Ask a homework question - tutors are online