Term Paper

Course ESCP FIS 2012

Fixed Income Securities

Instructor: Prof. B.B.Chakrabarti

Case Questions

a) Tata Steel Limited: Convertible Alternate Reference Securities (A) (IVEY 908N01) - Due on June 13, 2012

i) As an analyst, would you recommend an investment in the CARS, from a valuation viewpoint?

ii) Comment on the distinct features of the CARS and explain why Tata Steel chose to structure the bond the way it did?

iii) What concerns could an investor have on the terms of the CARS and what could be done to mitigate such concerns?

b) Walt Disney’s Sleeping Beauty Bonds – Duration Analysis – (HBS nos. 9-208-725 and 9-294-038) – Due on June 15, 2012

The case questions are given in HBS case 9-294-038

c) Arbitrage in the Government Bond Market – (HBS 9-293-093) - Due on June 15, 2012

i) Create the two synthetic bonds described in the case. How should the price of these synthetics relate to the callable bonds? Why? On January 7, 1991, how much would it cost to create the synthetic using the ‘05s? the ‘00s?

ii) On January7, 1991, how could Thompson exploit this apparent anomaly for investors who own the 8.25 May ’00-’05? What can investors not owning the callable bond do to profit?

iii) What might underlie the odd relative prices of the bonds Thompson is considering?

iv) Why should the Treasury issue callable debt? When should they exercise their right to call or redeem the bonds? Why would corporations issue callable debt? Why should investors want to buy callable debt?

d) The B.F.Goodrich-Rabobank Interest Rate Swap – (HNS 9-284-080) – Due on June 22, 2012

i) How large must the discount (X) be to make this an attractive deal for Rabobank?

ii) How large must the annual fee (F) be to make this an attractive deal for Morgan Guaranty?

iii) How small must the combination of F and X be to make this an attractive deal for B.F.Goodrich?

iv) Is this an attractive deal for the savings banks?

v) Is this a deal where everyone wins?...