Question

To answer this question, some outside research may be needed. I've attached part of an article pertaining to this question and have summarized all the necessary information in the question below.

On February 2nd, 2017, Apple (AAPL) Corporation issued a senior, unsecured bond with a maturity in 2047. The coupon rate on the new bond is 4.25% fixed paying semi-annual interest on February 9th and August 9th. At the time of issue the bond received a AA+ rating from Standard & Poor's and Aa1 rating from Moody's. The amount raised through this bond issue was $1 billion. In the first quarter of 2017, Apple saw a net income growth rate of 4.88% reflecting a new profit margin of 20.85%. In May 2017, Apple announced an increase in share buy backs from $175 billion to $210 billion and 10.5% dividend increase from $0.57 to $0.63. The bond does not have any protective covenants. The call feature is structured in such a way making a call not very likely at this time.

a. If today, a bondholder's required rate of return for Apple's bond is 5.15%, find the intrinsic value for the bond. Should the investor purchase the bond today? Explain your answer and show your calculator keystroke variables used to solve the intrinsic value.

b. If today, a different bondholder's required rate of return for Apple's bond is 3.85%, find the intrinsic value for the bond. Should this investor purchase the bond today? Explain your answer and show your calculator keystroke variables used to solve the intrinsic value.

c. Which required rate of return (5.15% or 3.85%) is most likely to be a correct required rate of return in today's bond market? Justify your answer.

Answer 1

Basically in the problem we can infer

there is a bond which will meture in 2047

With a call optoin however it is not likelly to excersise.

This solution is based on 2nd feb 2017 as the date of analysis.

expected rate of investor becomes disount rate for the coupan and meturity amount

for calculation Face value is assumed $100.

time period will be

for the Investor having expected rate 5.15%

No. of years remaining =30 years

value of bond of face value 100 = 85.33

PV(5.15%/2,30*2,-(100*4.25%)/2,-100)

b)

If an investor have expected return of 3.85 % then value of bond shall be $107.08 for bond having fV 100.

PV(3.85%/2,30*2,-(100*4.25%)/2,-100)

c)

Govt bonds were providing around 2.5 % return (apx) in 2017 ..hence 3.85 % looks more correct.