ANSWER

 Walt Disney Co:

The Walt Disney Company, often referred to simply as Disney, is a multinational mass media and entertainment conglomerate. Founded by Walt Disney and Roy O. Disney as the Disney Brothers Cartoon Studio in 1923, it has become one of the most famous and influential entertainment companies globally. Disney operates in various segments, including Media Networks, Parks, Experiences and Products, Studio Entertainment, and Direct-to-Consumer & International.

2) Bond Details and Questions:

• Coupon Rate: Walt Disney’s bond has a coupon rate of 3.0570%, which means that the bond pays an annual interest of 3.0570% of its face value.
• Annual Coupon Payment: With a face value of $1,000, the annual coupon payment is calculated as 3.0570% of $1,000, which equals $30.57.
• Coupon Payment Frequency: The bond pays coupons semi-annually (2 times a year), so each coupon payment is half of the annual payment, which is $15.29.
• Maturity Date: The bond matures on 3/30/2027, at which point the bondholder will receive the face value of $1,000.
• Last Price: The last traded price of the bond is $92.36, which is expressed as a percentage of the face value. In this case, it is 92.36% of $1,000.

Now, let’s address your questions:

a) How much would the investor pay for the bond assuming a $1,000 face value and using the last price listed on the website?

To calculate the price an investor would pay for the bond, you multiply the last price (92.36% of face value) by the face value: Price = $1,000 * 92.36% = $923.60

So, the investor would pay $923.60 for the bond.

b) Calculate the current yield of the bond assuming that the par value of the bond is $1,000.

The current yield is calculated by dividing the annual coupon payment by the current price of the bond and expressing it as a percentage: Current Yield = (Annual Coupon Payment / Current Price) * 100

Current Yield = ($30.57 / $923.60) * 100 ≈ 3.31%

c) How much is the bond’s YTM (Yield to Maturity)? Use the last trade price, round the number of years to the whole number. Show your calculations. Explain the meaning of YTM.

Yield to Maturity (YTM) is the total return anticipated on a bond if held until it matures. It takes into account the current market price, par value, coupon interest rate, and the time remaining until maturity.

To calculate YTM, you would typically need financial software or a financial calculator, as it involves solving for the discount rate that makes the present value of the bond’s future cash flows equal to its current price. However, I can provide a simplified approximation:

Assuming the bond matures in 2027, there are about 3.5 years left until maturity. You would use this time frame and the bond’s current price to estimate YTM. But please note, this is a rough estimate, and the actual YTM may differ:

YTM ≈ Annual Coupon Payment / Current Price + ((Face Value – Current Price) / Years to Maturity)

YTM ≈ ($30.57 / $923.60) + (($1,000 – $923.60) / 3.5) ≈ 3.32%

The YTM of approximately 3.32% represents the annualized rate of return an investor can expect if they hold the bond until maturity.

d) Is the bond callable or not? If the bond that you chose is callable (non-callable), will it change your decision to buy it? Why or Why not?

To determine if the bond is callable, you would need to refer to the bond’s official documentation or prospectus. Callable bonds give the issuer the option to redeem the bond before its maturity date. If it’s callable, it may affect your decision to buy it. Callable bonds usually offer higher coupon rates to compensate for the additional risk to investors. If you are risk-averse and prefer a stable income stream, you might want to consider non-callable bonds.

3) Major Shortcomings of YTM and Current Yield:

a) Yield to Maturity (YTM): One significant shortcoming of YTM is that it assumes the investor will hold the bond until maturity and that all coupon payments will be reinvested at the same YTM rate. This assumption may not reflect reality as investors often buy and sell bonds before maturity and may not be able to reinvest coupon payments at the same rate. Additionally, YTM does not consider factors such as changes in interest rates or credit risk over time, which can impact the actual return on investment.

b) Current Yield: The major shortcoming of current yield is that it provides a simplistic view of a bond’s return. It only considers the annual coupon payment in relation to the current market price, ignoring the potential capital gains or losses if the bond is bought at a premium or discount to its face value. Current yield also doesn’t account for the time value of money, making it less useful for evaluating long-term investments.

In summary, while YTM and current yield are valuable metrics for assessing bond investments, they have limitations. Investors should consider a range of factors, including market conditions, interest rate expectations, and individual investment goals, when making bond investment decisions.