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ch6 - CHAPTER 6 INTEREST RATES AND BOND VALUATION LEARNING...

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L E A R N I N G G O A L S 262 I NTEREST R ATES AND B OND V ALUATION C H A P T E R Across the Disciplines WHY THIS CHAPTER MATTERS TO YOU Accounting: You need to understand interest rates and the various types of bonds in order to be able to account properly for amortization of bond premiums and discounts and for bond purchases and retirements. Information systems: You need to understand the data that you will need to track in bond amortization schedules and bond valuation. Management: You need to understand the behavior of interest rates and how they will affect the types of funds the firm can raise and the timing and cost of bond issues and retirements. Marketing: You need to understand how the interest rate level and the firm’s ability to issue bonds may affect the availability of financing for marketing research projects and new-product development. Operations: You need to understand how the interest rate level may affect the firm’s ability to raise funds to maintain and increase the firm’s production capacity. Apply the basic valuation model to bonds and describe the impact of required return and time to maturity on bond values. Explain yield to maturity (YTM), its calculation, and the procedure used to value bonds that pay interest semiannually. LG6 LG5 Describe interest rate fundamentals, the term structure of interest rates, and risk premiums. Review the legal aspects of bond financing and bond cost. Discuss the general features, quotations, ratings, popular types, and international issues of corpo- rate bonds. Understand the key inputs and basic model used in the valuation process. LG4 LG3 LG2 LG1 6
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263 F ord and Ford Motor Credit Co . (FMCC), its finance unit, were frequent visitors to the corporate debt markets in 2001, selling over $22 billion in long-term notes and bonds. Despite the prob- lems in the auto industry, investors nervous about stock market volatility were willing to accept the credit risk to get higher yields. The company’s 2001 offerings had something for all types of investors, ranging from 2- to 10-year notes to 30-year bonds. Demand 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 Octo- ber’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 short- term 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.
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