You are an intern with Sirius Satellite Radio in their corporate finance division. The,firm is planning to issue $50 million of 12% annual coupon bonds with a ten-year,maturity. Your boss wants you to determine the price of the bond and the initial yield,to maturity based on Sirius current bond rating. To prepare this information, you will,have to determine Sirius’ current debt raring and the yield for their particular rating.,1. Begin by finding the current U.S. Treasury yield curve. At the Treasury Web site,(www .rreas.gov), search using the term ‘yield curve" and select "US Treasury-Daily,Treasury Yield Curve." Beware. There will likely be two links with the same title.,Look at the description below the link and select the one that does NOT say ‘Real,Yield’. You want the nominal rates. The correct link is likely to be the first link on the,page. Record the current yield that corresponds to the maturity of Sirius bond.,2. Find the current bond rating for Sirius, Go to Standard & Poor’s Web site,(www.standardandpoors.com). Select "Find a Rating" from the list at the left of the,page, then select "Credit Ratings Search." At this point you will have to register (it’s,free). Next you will be able to search by Organization Name-enter Sirius and select,Sirius Satellite Radio. Use the credit rating for the organization, not the specific issue,ratings.,3. Find the current yield spreads for the various bond ratings. Unfortunately, the,current spreads are available only for a fee, so you will use old ones. Go to,BondsOnline (www.bondsonline.com) and click on "Today’s Market." Next click on,"Corporate Bond Spreads". Download this table to Excel and copy and paste it to the,same file as the Treasury yields. However, note that the spread is in basis points,,which are 1/100th of a percentage point.,2,4. Return to Excel and create a timeline with the cash flows and discount rates you,will need to value the new bond issue.,a. To create the required spot rates For Sirius’ issue add the appropriate,spread to the Treasury yield of the same maturity.,b. The yield curve and spread rates you have found do not cover every year that,you will need for the new bonds- Specifically, you do not have yields or,spreads for four-, six-, eight-, and nine-year maturities, Fill these in by,linearly interpolating the given yields and spreads. For example, the fouryear,spot rate and spread will be the average of the three- and five-year rates.,The six-year rate and spread will be the average of the five- and seven-year,rates. For years eight and nine you will have to spread the difference,between years seven and ten across the two years.,c. To compute the spot rates for Sirius’ current debt rating, add the yield spread,to the Treasury rate for each maturity- However, note that the spread is in,basis points, which are 11100th of a percentage point.,d. Compute the cash flows that would be paid to bondholders each year and,add them to the timeline.,5. Use the spot rates to calculate the present value of each cash flow paid to the,bondholders.,6. Compute the issue price of the bond and its initial yield to maturity
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