Microsoft Case Study

1. MSFT Notes

a. Microsoft Corporation is raising money to be used for “general corporate purposes, which may include funding for net working capital, capital expenditures, repurchases of stocks and acquisitions.” This is only the second time in the history of Microsoft have they done something like this. The company has so much cash held overseas that they need to give out dividends and buybacks.

b. Yes the paper is pretty cheap.

The YTM for the “2013 Notes” is .93%. I calculated that by taking the Issue price or percentage and multiplying that to get $998.35 for our Present Value. We are paying interest or coupon every 6 months (twice a year) so our N is 6 (2*3years that the bond has left to maturity). Our future value is $1000 which is what is paid on the maturity date. I typed in $4.375 for our pmt which is the amount that is paid to the bondholder each period.

The YTM for the “2015” Notes is 1.72%

The YTM for the “2020” Notes is 3.10%

The YTM for the “2040” Notes is 4.57%

c. The yield to maturity differs from the coupon rate because the yield to maturity is the rate of the return that is anticipated on a bond if it held until the maturity date. YTM is considered a long term bond yield. The coupon rate goes into the calculation of yield to maturity. If the coupon rate is greater than the YTM than the issue price is greater than par value. If the YTM is greater than the coupon rate than the issue price is less than par value.

d. Microsoft issued four papers instead of one because they want to make sure that they have sufficient funds to finance their operations. If they repay all of that debt at once it will be a huge change in their balance sheet and investors don’t like huge change. They want to gradually pay back their debt in order to make sure they have used the debt for the purpose that they issued it. You want to compare the YTM of the Microsoft notes with the YTM of the U.S. Treasury Instruments.

e. I do expect at least the 30...