Disney: Sleeping Beauty Bonds 5l2n70

1. Speculate why Disney management chose to issue unusually long-term bonds? (e.g., What predictions was management making about future interest rates?) Companies issue bonds with long maturities because the goal of any business is to profit from the market's demand. Certain institutional investors use long term bonds to lengthen the duration of their bond portfolios to fulfill certain duration-based goals. The demand for this type of long-term bond as an indicator of consumer sentiment for a specific company. Such a bond is a chance to lock into the very low interest rates seen in the credit market for a long time. 2.

Why did the Disney bonds have a higher yield than 30-year U.S. Treasury bonds?

Disney Bond has higher yield than 30-year US Treasury bonds because: ● Payment period for 100 years, has more liquidity risk ● Higher credit risk compared with US Treasury bonds ● Disney’s bond incorporates a call option. Thus, investors require larger yield of this bond. 3. From the perspective of the bondholder, which was more valuable, the $300 million principal (or face value) of the bonds or the semi-annual coupon payments? [Hint: Calculate the present value of a) the face value and b) the coupon payment stream.] From the perspective of the bondholder, semi-annual coupon payments are more valuable than the final payment of face value in of present value. For coupon yield = 7.55% as YTM, the present value for face value is $207,052.17 Present value for coupon payment is $149,999,785.65.

4. The Pricing Supplement to the Prospectus discusses Disney’s option to call or redeem the bonds beginning July 15, 2023 at 103.02% of their face value – declining to 100% of face value after July 15, 2043. a. From the perspective of the bondholder, what effect does the Company’s call option have 
 on the attractiveness of the Bonds at the issuance date? From the investors’ perspective, the Company’s call option will make the bond less attractive at issuance date, because investors will bear the interest risk when the interest declines in 30 years.

b. From the perspective of the Disney Company, why would management include a call 
 option in the of the bond? Management of the Disney Company included a call option because it provided the chance to buy back the bonds and issue new bonds at lower costs. Obviously this is beneficial to the company. c. On the next day, Coca-Cola issued $150 million of 100-year non-callable bonds. 
 Speculate as to how the yield differed between the Disney and Coca-Cola issues. Coca-Cola’ s bonds have a higher yield than Disney’s callable bonds, because non-callable bond protect the interest of the investors versus the company. 5. From the perspective of the bondholder, calculate the market value of the bonds one year after the date of issuance if: a. Long term yields for similar risk securities increased by 1%. b. Long term yields for similar risk securities decreased by 1%. c. Interest rates had not changed but the expected life of the Company dropped from 100 years to 50 years (with 49 remaining). d. Discuss the potential impact of inflation on bondholders.

FV

Interest rate

No. of years

PV

300,000,000

0.038

198

$298,027,540.97

300,000,000

0.028

198

$404,023,394.81

300,000,000

0.033

98

$341,389,275.87

Inflation will negatively impact the benefit of bondholders. Inflation will increase the interest rates. The bondholders may earn higher yields if they invest on alternative investments. 6. From the perspective of the Disney Company, use a spreadsheet to prepare bond amortization tables based on the following independent sets of assumptions:2 a. Bonds issued at par (face value) with semi-annual coupon payments. b. Bonds issued at a discount (i.e., less than face value) with semi-annual coupon payments, 
 where the coupon rate of 7.55% was less than the market yield of 9%. c. Bonds issued at a (i.e., greater than face value) with semi-annual coupon 
 payments, where the coupon rate of 7.55% was greater than the market yield of 6%.

7. From the perspective of the Disney Company, prepare a journal entry to: a. Record the issuance of the bonds on July 29, 1993. (Hint: look at the cover page of the Pricing Supplement to the Prospectus.) dr. cash Cr. Bonds payable

8. As senior manager at Disney in 1993, would you have ed the issuance of 100-year bonds given the then-current economic environment? As a senior manager at Disney Company in 1993, I will issue long-term bonds in the then current circumstance. The market interest rates were low all around the world and the economy will finally recover, bringing interest rate to a normal level. Thus, the expected long-term interest rates will rise. Under this circumstance, the company will lock this good opportunity of low cost of fund by issuing long-term debts. Disney also has a very strong brand and a sentimental value attached to the brand. It is their strongest factor of production. Those who invest in this long term bond, will actually be those who truly believe in the Disney company. Its a good strategy to leverage the brand loyalty of long term investors (disney philes).