List the pertinent information on the bond you chose and then calculate the price of one bond from both companies.
The two bonds that were selected are offered by Goldman Sachs and Massey Energy. In the case of Goldman Sachs, a general obligation bond was chosen. It has a number of features to include: a non callable provision, a coupon rate of 3.70%, a price of 107.50, a current yield of 3.44%, a yield to maturity of .77%, it matures in August 2015 and pays interest semi annually. (“Goldman Sachs 2012 Annual Report,” 2012) (Standard and Poor’s, 2012)
While Massey Energy, was selected based upon the fact that it is a general obligation of the parent company (i.e. Alpha Natural Resources). There are a number of features included with it such as: a non callable provision, a price of 98.75, a coupon of 3.25%, a current yield of 3.29%, a yield to maturity of 3.75%, it matures in August 2015 and pays interest semi annually. Moreover, this issue is sold at a discount, to offer investors with growth and higher rates of interest. These figures are illustrating contrasting points of view about both companies surrounding their strengths and weaknesses. (“Alpha Natural Resources Form 10K,” 2012) (Standard and Poor’s, 2012)
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Which bond is receiving the higher price? Explain your answer.
The bond with the higher price is Goldman Sachs. This is because the company pays more interest and it has a stronger credit rating. These variables are important, as investors will bid up the price. As interest rates, are very low and expected to continue at these levels for the foreseeable future. This makes it worth more, through having lower amounts of risk to the principal. For bond buyers, these factors mean that they will demand higher prices based upon the benefits it can provide. (“Goldman Sachs 2012 Annual Report,” 2012) (“Alpha Natural Resources Form 10K,” 2012) (Standard and Poor’s, 2012)
From a time value of money frame of mind, what does each rate say about the viewpoint on the time value of money?
In the case Goldman Sachs, the rate is showing how their time value of money is worth more. This is because the company is expected to deliver consistent returns. These factors mean that the company will see an increase in demand with the possibility of enhancing the value of these holdings over a longer period of time. (“Goldman Sachs 2012 Annual Report,” 2012) (Standard and Poor’s, 2012)
While Massey Energy, has lower expectations related to the time value of money. This is based upon the firm being subject to issues. That could have an impact on its ability to repay the loan. Most notably: changes in commodities prices and the strategies utilized by executives. As a result, investors are expecting a lower return from these assets and have reduced their expectations for the company. (“Alpha Natural Resources Form 10K,” 2012) (Standard and Poor’s, 2012)
Which company has a better credit rating? Explain your answer.
Goldman Sachs has better credit rating. This is because the firm has low amounts of debt (i.e. $466 million). At the same time, it can deliver 30% year over year earnings growth on revenues of $36.29 billion. These different factors are a sign of how they are fiscally sound and can repay their long term obligation. As a result, Goldman Sachs has a current rating of A. (“Goldman Sachs 2012 Annual Report,” 2012) (Standard and Poor’s, 2012)
In the case of Massey Energy, the company is facing serious challenges from a series of accidents that occurred at its coal mines between 2008 and 2011. These factors resulted in the firm being purchased by Alpha Natural Resources in 2011. Moreover, this kind of acquisition makes the company flexible in adjusting with sudden changes in commodities prices. (“Alpha Natural Resources Form 10K,” 2012) (Standard and Poor’s, 2012)
Alpha Natural Resources has high amounts of debt at $3.3 billion. This is in comparison with $6.3 billion in revenues and they are experiencing negative profit margins of – 39.10%. These factors are illustrating how Alpha Natural Resources has unstable stable earnings. This means that they were assigned a lower rating credit rating of B. (“Alpha Natural Resources Form 10K,” 2012) (Standard and Poor’s, 2012)
Based on the credit rating, which company do you believe the bank feels more secure will pay back the loan? Explain your answer.
The bank feels more secure with Goldman Sachs. This is because the company has a history of paying its outstanding debts. It also received government assistance during the Financial Crisis of 2008 and has paid back the money. Since this time, their earnings have been steadily increasing and management has restructured / reduced the total amounts of outstanding debt. Based upon these factors, bankers believe that Goldman Sachs has the ability to repay any funds which are loaned to the company. This is why it is given a higher rating from: the confidence in the business model and the practices which are utilized. (“Goldman Sachs 2012 Annual Report,” 2012) (Standard and Poor’s, 2012)
Why does the bank charge more interest for one company than another?
The bank will charge more interest because of the underlying amounts of risk. This is designed to reward investors, from taking a chance of the firm going into bankruptcy. In order to compensate them, they will receive higher rates of interest and the possibility of capital appreciation. (“Alpha Natural Resources Form 10K,” 2012) (Standard and Poor’s, 2012)
What does the credit rating say to an investor?
The credit rating tells bondholders the levels of risk on various forms of debt. This helps them to determine the stability of the interest payments and the possibility of company defaulting on its obligations. (Standard and Poor’s, 2012)
Which bond looks is more financially attractive? Explain why you chose the answer you did.
Goldman Sachs is more attractive. This is because the company has higher levels of growth and lower amounts of debt. At the same time, they have a better credit rating. This means that the company is stable and can repay its loans at maturity. (Standard and Poor’s, 2012)
- Alpha Natural Resources Form 10K. (2012). Alpha Natural Resources. Retrieved from: http://files.shareholder.com/
- Goldman Sachs 2012 Annual Report. (2012). Goldman Sachs. Retrieved from: http://www.goldmansachs.com
- Standard and Poor’s. (2012). Standard and Poor’s Stock and Bond Guide. New York, NY: McGraw Hill.
