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The Walt Disney Company:
100 Year Bond Issue Case Study
Brian Bride
April 23, 2015
Finance 630
The 100 Year WaltDisneyBond
Thisbondwas assigned the CUSIPnumberof 254687AH9. The bondwas ratedA1 byMoody’sand A by
S&P onthe issue date.1
The bond has multipleembeddedoptions. It iscallable after30 yearsat
103.020% of par. The redemptionprice slowlyreducesuntil itreachesparin2043. Thereafter,the
bondis callable atpar. Afterthe 30 yeartime frame,the bondcan be calledcontinuously. Itisalsoa
classifiedasaseniorunsecureddebenture. There wasnocollateral forthe bond,butitis a seniorissue,
a claimwill have priorityoverajuniorissue inthe eventof default.
YieldCalculations:
Bond Issue
Disney issuedthe 100 yearbondinsteadof a 30 yearbondto take advantage of the market. The original
issue wasfor$150 millionbutthe demandwasstrongthat Disneyissued$300 million intotal. With
such a longtime frame, Disneyisbettingthatinterestrateswill goupovertime.
Disneyisalsotakingadvantage of the longterm. It is usingthe capital to investinitstheme parks,
whichis46% of its total revenues. The longtermwill allowDisneytosee the returnonits theme park
investmentslongbeforethe issue isdue.
Pros and Cons of Investingin Long Term Issues
Interestrate riskand reinvestmentriskare the twoissuesthatan investorwouldface owningthisbond
overa short amountof time. Asan individual investor,itwouldbe more of a tradingstrategythena buy
and holdif one wouldwantto ownthisDisneyissue.
If interestratescontinue tostaylow,the yieldof the Disneybondisveryattractive. There islittle riskin
the company.
To investigate the possible interestrate risksof a 30 year bondversusa 100 year bond,the Macaulay
Durationcan be used. Twodifferentinstanceswereexamined,aparbondand a premiumbond. The
yieldtomaturitychosenforthe premiumbondisbased onExhibit4,a 10+ year corporate bondin 1993.
1 http://cbonds.com/emissions/issue/71771
Yield to First Call Yield to First Par Call
N 60 100
PMT 3.775$ 3.755
PV (100.00)$ -100
FV 103.02$ 100
I/Y 7.576% 7.55%
The durationis a goodmeasure of howsensitive the issue istointerestrate changes. Whensimilar
durations,itdemonstratesthatevenwiththe longerterm, there isnota large difference ininterestrate
riskfor the two issues.
Treasury YieldCurve on July 29 of 1991, 1992 and 1993
Data Source:http://www.treasury.gov/resource-center/Pages/default.aspx
The Treasury YieldCurve forJuly29th
of 1991, 1992 and1993 is linearinnature. Duringthese three
years,the curve has shifteddownandtothe right,indicatingareductionininterestrates. The trendof
the treasuryyieldcurve isto continue toshiftdownandto the right. As showninExhibit3,it appears
that the treasuryyieldcurve will continue todecrease if historyisapredictor.
Examiningthe chance of future interestratesgoinglower,itwoulddependonhow longyouwouldbe
willingtostayinthe Disneybond. If youwait too longand ratesremainlow,Disneyisgoingtocall the
bondback. Asan individual investor,a100 year bondlike the Disneyissuedoesn’tmake anysense. But
Modified and Macaulay Duration for a Par Bond
Payments Coupon YTM Modified Macaulay
30 7.55 7.55 11.753 12.640
100 7.55 7.55 13.236 14.235
Modified and Macaulay Duration for a Premium Bond
Payments Coupon YTM Modified Macaulay
30 7.55 6.97 13.761 12.864
100 7.55 6.97 15.340 14.340
pensionfundsorotherfundsthatneedlonginvestmentsandare lookingforagood yieldmightwantto
invest.
Current Bond Ratings
Moody’scurrentbond ratingfor thisDisneyissue isA12
. The last time the bondwasrated wasApril 16,
2008. At issue,the bondwasratedAa3. Duringthe next10 years,the bondwasperiodicallyonwatch
and wasdowngraded3 timestoA3 on October18, 2002. Since March of 2006, the bondhas been
periodicallyupgradeduntil reachingitspresentrating.
Standard& Poor’s(S&P) hasa current ratingof A3
. It was lastrated onOctober5, 2007. The last credit
watch date was August18, 2010. The outlookwas“Stable”atthat time.
Current Bond Financials
The last trade of thisDisneyissue wason2/6/2015. The price at that time was $125.00 and the yieldto
maturitywas4.285%4
.
2 https://www.moodys.com/credit-ratings/Disney-Enterprises-Inc-credit-rating-
807600?emvalue=CUS:254687AH9&emsk=32&isMaturityNotDebt=0&isWithDrawnIncluded=0
3 http://www.standardandpoors.com/en_US/web/guest/ratings/entity/-/org-
details/sectorCode/CORP/entityId/109144
4 http://finra-markets.morningstar.com/BondCenter/BondDetail.jsp?ticker=C5929&symbol=DIS.GC
RecentMarket Transactions
Data Source:http://finra-
markets.morningstar.com/BondCenter/BondTradeActivitySearchResult.jsp?ticker=C5929&startdate=04
%2F20%2F2014&enddate=04%2F20%2F2015
The bond isnot activelytraded,with13transactionsinthe last five months. There was tradingactivity
on December1,2014 and againon December5, with nine transactionsduring thattime span. There has
beenfoursince.
In 2014, 7,887,000 bondissuestradedhands. That isan average tradingvolume of 21,608 bond issues
perday. There were tradeson52 differentdaysin2014, witha highof eighttradesonOctober7, 2014.
The volatilityof the stockiscomparable tothe volatilityof the bond. Usingdatesthatcoincide withthe
bondsettlementdates,the standarddeviationwasfoundforboththe stockand the bondprice.
Date Time Settlement Status Quantity Price Yield
2/6/2015 11:53:05 2/11/2015 T 8000 125 4.285%
1/8/2015 11:12:24 1/13/2015 T 50000 123.052 4.546%
1/8/2015 11:12:11 1/13/2015 T 50000 125 4.306%
12/12/2014 14:29:00 12/17/2014 T 8000 124.9 4.337%
12/5/2014 14:49:47 12/10/2014 T 975000 127.924 3.980%
12/5/2014 14:44:27 12/10/2014 T 2500000 127.907 3.982%
12/5/2014 9:58:01 12/10/2014 T 25000 129.062 3.847%
12/5/2014 9:58:00 12/10/2014 T 25000 128.962 3.858%
12/4/2014 16:39:14 12/9/2014 T 3500000 127.761 4.000%
12/1/2014 16:11:00 12/4/2014 T 25000 125.301 4.297%
12/1/2014 16:11:00 12/4/2014 T 25000 125.201 4.309%
12/1/2014 8:53:55 12/1/2014 T 25000 122.95 4.586%
12/1/2014 8:53:55 12/1/2014 T 25000 123.062 4.572%
Data Source:http://finance.yahoo.com/q/hp?s=DIS+Historical+Prices
If a bondwas tradedmore than once ina day,the high,low,openand/orclose of the stock wasused
that day to representthe volatility. We feltthatwas importantto have equivalentdates anddatapoints
to compare.
It isnot unusual forthe bondand the stock to have similarvolatility. Disneyisamature companythat
has manysourcesof revenue andisa fairlystable company. The bondandthe stock have a similarrisk
profile due toDisney’sabilitytobringinrevenuetopaycouponpayments andbe able to pay dividends
to shareholders.
RealizedAnnual Return
Let’ssay that youpurchased$100 of the DisneybondonJuly29, 1993. You thenheldthe bondand sold
it afterthe firstcouponpaymentof 2015 for $125.00 (ignore accruedinterestandassume bondsold
afterlast couponispaid).
Bond trades Stock Trades
2/6/2015 $125.00 2/6/2015 102.02$
1/8/2015 $123.05 1/8/2015 94.30$
1/8/2015 $125.00 1/8/2015 93.56$
12/12/2014 $124.90 12/12/2014 91.49$
12/5/2014 $127.92 12/5/2014 93.98$
12/5/2014 $127.91 12/5/2014 93.41$
12/5/2014 $129.06 12/5/2014 93.80$
12/5/2014 $128.96 12/5/2014 94.21$
12/4/2014 $127.76 12/4/2014 93.23$
12/1/2014 $125.30 12/1/2014 92.63$
12/1/2014 $125.20 12/1/2014 93.14$
12/1/2014 $122.95 12/1/2014 92.10$
12/1/2014 $123.06 12/1/2014 92.70$
Average 125.85$ Average 93.89$
Std Dev 2.135198 Std Dev 2.475865
Semi-annual Coupon Payment $3.775 Future Value of Reinvested Coupons $253.00
Par/PV $100
Sale Price $125 Total Future Value $378.00
Payments 1993-2015 42
Reinvest at 2015 YTM (semiannual) 2.1425% Semi-annual return 3.216%
The realizedannual returnis6.432%, whichisa lower thanthe yieldtomaturityin1993 of 7.55%. That
isassumingthat youcan reinvestthe couponpaymentsat the yieldtomaturityin2015.
The yieldtomaturityisa promisedyield. Itcan alsobe describedasanaverage of the yieldsduringthe
lifetimeof the bond. The realizedannual returnisamore accurate representationof the returna
bondholderwill receive. Yieldtomaturityishigherbecause the interestrate riskisignoredandit
assumesthatthe debtis heldtomaturity. In thisexample, the issue issoldbefore the maturitydate (22
yearsinsteadof 100 years).
Cost of Call Option
The 100 year Disneyissue iscallable after30yearsat 103.020% of par. The bondcan be describedasa
30 year bondwitha 70 year option.
What wouldbe the cost of thiscall option? The presentvalue of twoissues,a30 year bondwitha
couponrate of 7.55% witha redemptionvalue of $103.02 and another30 yearbondwitha couponrate
of 7.25% witha redemptionvalue of $100. The yieldtomaturityis6.97%, the rate fromExhibit 4 for an
Agency10+ yearissue.
Usingthe time value of money,the presentvalue of the above issueswascalculated:
The cost of the “70 YearOption”is$4.14 ($107.64-$103.50).
Purchase WhichBond?
Suppose thatthe 100 yearbondhas a coupon rate of 7.55% or youcouldpurchase a 30 yearbondat
7.25% couponrate androlloverthatinvestmentin30 years.
If you couldreinvestthe savingsfromthe 30 yearbondat the couponrate,you wouldhave $30.91 after
30 years. In orderto refinance the bond,youwouldneed$69.09 after 30 yearsto breakeven. The 70
yearbond musthave a 7.55% couponrate to be comparable tothe previous100 yearissue. That would
indicate abreakeveninterestrate of 10.92% annually. The couponrate of the bond in2023 is goingto
be much lowerthan10.92% if historical couponpaymentsandinterestrateshold. Therefore itisa
betterdeal toinvestinthe 100 yearbond.
30 Year Bond 30 Year Bond with "70 Year Option"
N 60 N 60
Coupon 3.625 Coupon 3.775
FV 100 FV 103.02
I/Y 3.485 I/Y 3.485
PV 103.5 PV 107.64
InterestRate in 2023
If Exhibit3 (page 12) inthe case isusedinconjunctionwiththe TreasuryYieldCurve displayedabove,it
isreasonable toassume thatrates will continuetogodownin the future. It lookslike rateshave peaked
in1981 and seemto be fallingbacktowardsthe 4% that wasseenin1963. Evenif after20 yearsthe
ratesbeginto increase again,itseemsunlikelythatrateswill goabove 10%. Asdescribedinthe case,
RobertJ. Samuelsonbelievesthatthe rise inratesbetween1960 and 1980 wasa resultof government
policies. The governmenthaslearnedtheirlessonandwill notallow the ratestobecome ashighinthe
future. Fallinginterestratesisfavorable forbondprices. If the ratescontinue tofall,Disneywill be
able to use itscall optionsto buyback debtand reissue ata more favorable couponrate. Basedonthis
evidence we believerateswill still be relativelylow in2023.
30 Year Issue Coupon Reinvestment Investment Needed to Meet Debt
N 60 N 140
I/Y 3.625% PV ($69.09)
PMT $0.15 FV $100
PMT $3.78
FV $30.91 I/Y 5.46%

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Disney Case Bride

  • 1. The Walt Disney Company: 100 Year Bond Issue Case Study Brian Bride April 23, 2015 Finance 630
  • 2. The 100 Year WaltDisneyBond Thisbondwas assigned the CUSIPnumberof 254687AH9. The bondwas ratedA1 byMoody’sand A by S&P onthe issue date.1 The bond has multipleembeddedoptions. It iscallable after30 yearsat 103.020% of par. The redemptionprice slowlyreducesuntil itreachesparin2043. Thereafter,the bondis callable atpar. Afterthe 30 yeartime frame,the bondcan be calledcontinuously. Itisalsoa classifiedasaseniorunsecureddebenture. There wasnocollateral forthe bond,butitis a seniorissue, a claimwill have priorityoverajuniorissue inthe eventof default. YieldCalculations: Bond Issue Disney issuedthe 100 yearbondinsteadof a 30 yearbondto take advantage of the market. The original issue wasfor$150 millionbutthe demandwasstrongthat Disneyissued$300 million intotal. With such a longtime frame, Disneyisbettingthatinterestrateswill goupovertime. Disneyisalsotakingadvantage of the longterm. It is usingthe capital to investinitstheme parks, whichis46% of its total revenues. The longtermwill allowDisneytosee the returnonits theme park investmentslongbeforethe issue isdue. Pros and Cons of Investingin Long Term Issues Interestrate riskand reinvestmentriskare the twoissuesthatan investorwouldface owningthisbond overa short amountof time. Asan individual investor,itwouldbe more of a tradingstrategythena buy and holdif one wouldwantto ownthisDisneyissue. If interestratescontinue tostaylow,the yieldof the Disneybondisveryattractive. There islittle riskin the company. To investigate the possible interestrate risksof a 30 year bondversusa 100 year bond,the Macaulay Durationcan be used. Twodifferentinstanceswereexamined,aparbondand a premiumbond. The yieldtomaturitychosenforthe premiumbondisbased onExhibit4,a 10+ year corporate bondin 1993. 1 http://cbonds.com/emissions/issue/71771 Yield to First Call Yield to First Par Call N 60 100 PMT 3.775$ 3.755 PV (100.00)$ -100 FV 103.02$ 100 I/Y 7.576% 7.55%
  • 3. The durationis a goodmeasure of howsensitive the issue istointerestrate changes. Whensimilar durations,itdemonstratesthatevenwiththe longerterm, there isnota large difference ininterestrate riskfor the two issues. Treasury YieldCurve on July 29 of 1991, 1992 and 1993 Data Source:http://www.treasury.gov/resource-center/Pages/default.aspx The Treasury YieldCurve forJuly29th of 1991, 1992 and1993 is linearinnature. Duringthese three years,the curve has shifteddownandtothe right,indicatingareductionininterestrates. The trendof the treasuryyieldcurve isto continue toshiftdownandto the right. As showninExhibit3,it appears that the treasuryyieldcurve will continue todecrease if historyisapredictor. Examiningthe chance of future interestratesgoinglower,itwoulddependonhow longyouwouldbe willingtostayinthe Disneybond. If youwait too longand ratesremainlow,Disneyisgoingtocall the bondback. Asan individual investor,a100 year bondlike the Disneyissuedoesn’tmake anysense. But Modified and Macaulay Duration for a Par Bond Payments Coupon YTM Modified Macaulay 30 7.55 7.55 11.753 12.640 100 7.55 7.55 13.236 14.235 Modified and Macaulay Duration for a Premium Bond Payments Coupon YTM Modified Macaulay 30 7.55 6.97 13.761 12.864 100 7.55 6.97 15.340 14.340
  • 4. pensionfundsorotherfundsthatneedlonginvestmentsandare lookingforagood yieldmightwantto invest. Current Bond Ratings Moody’scurrentbond ratingfor thisDisneyissue isA12 . The last time the bondwasrated wasApril 16, 2008. At issue,the bondwasratedAa3. Duringthe next10 years,the bondwasperiodicallyonwatch and wasdowngraded3 timestoA3 on October18, 2002. Since March of 2006, the bondhas been periodicallyupgradeduntil reachingitspresentrating. Standard& Poor’s(S&P) hasa current ratingof A3 . It was lastrated onOctober5, 2007. The last credit watch date was August18, 2010. The outlookwas“Stable”atthat time. Current Bond Financials The last trade of thisDisneyissue wason2/6/2015. The price at that time was $125.00 and the yieldto maturitywas4.285%4 . 2 https://www.moodys.com/credit-ratings/Disney-Enterprises-Inc-credit-rating- 807600?emvalue=CUS:254687AH9&emsk=32&isMaturityNotDebt=0&isWithDrawnIncluded=0 3 http://www.standardandpoors.com/en_US/web/guest/ratings/entity/-/org- details/sectorCode/CORP/entityId/109144 4 http://finra-markets.morningstar.com/BondCenter/BondDetail.jsp?ticker=C5929&symbol=DIS.GC
  • 5. RecentMarket Transactions Data Source:http://finra- markets.morningstar.com/BondCenter/BondTradeActivitySearchResult.jsp?ticker=C5929&startdate=04 %2F20%2F2014&enddate=04%2F20%2F2015 The bond isnot activelytraded,with13transactionsinthe last five months. There was tradingactivity on December1,2014 and againon December5, with nine transactionsduring thattime span. There has beenfoursince. In 2014, 7,887,000 bondissuestradedhands. That isan average tradingvolume of 21,608 bond issues perday. There were tradeson52 differentdaysin2014, witha highof eighttradesonOctober7, 2014. The volatilityof the stockiscomparable tothe volatilityof the bond. Usingdatesthatcoincide withthe bondsettlementdates,the standarddeviationwasfoundforboththe stockand the bondprice. Date Time Settlement Status Quantity Price Yield 2/6/2015 11:53:05 2/11/2015 T 8000 125 4.285% 1/8/2015 11:12:24 1/13/2015 T 50000 123.052 4.546% 1/8/2015 11:12:11 1/13/2015 T 50000 125 4.306% 12/12/2014 14:29:00 12/17/2014 T 8000 124.9 4.337% 12/5/2014 14:49:47 12/10/2014 T 975000 127.924 3.980% 12/5/2014 14:44:27 12/10/2014 T 2500000 127.907 3.982% 12/5/2014 9:58:01 12/10/2014 T 25000 129.062 3.847% 12/5/2014 9:58:00 12/10/2014 T 25000 128.962 3.858% 12/4/2014 16:39:14 12/9/2014 T 3500000 127.761 4.000% 12/1/2014 16:11:00 12/4/2014 T 25000 125.301 4.297% 12/1/2014 16:11:00 12/4/2014 T 25000 125.201 4.309% 12/1/2014 8:53:55 12/1/2014 T 25000 122.95 4.586% 12/1/2014 8:53:55 12/1/2014 T 25000 123.062 4.572%
  • 6. Data Source:http://finance.yahoo.com/q/hp?s=DIS+Historical+Prices If a bondwas tradedmore than once ina day,the high,low,openand/orclose of the stock wasused that day to representthe volatility. We feltthatwas importantto have equivalentdates anddatapoints to compare. It isnot unusual forthe bondand the stock to have similarvolatility. Disneyisamature companythat has manysourcesof revenue andisa fairlystable company. The bondandthe stock have a similarrisk profile due toDisney’sabilitytobringinrevenuetopaycouponpayments andbe able to pay dividends to shareholders. RealizedAnnual Return Let’ssay that youpurchased$100 of the DisneybondonJuly29, 1993. You thenheldthe bondand sold it afterthe firstcouponpaymentof 2015 for $125.00 (ignore accruedinterestandassume bondsold afterlast couponispaid). Bond trades Stock Trades 2/6/2015 $125.00 2/6/2015 102.02$ 1/8/2015 $123.05 1/8/2015 94.30$ 1/8/2015 $125.00 1/8/2015 93.56$ 12/12/2014 $124.90 12/12/2014 91.49$ 12/5/2014 $127.92 12/5/2014 93.98$ 12/5/2014 $127.91 12/5/2014 93.41$ 12/5/2014 $129.06 12/5/2014 93.80$ 12/5/2014 $128.96 12/5/2014 94.21$ 12/4/2014 $127.76 12/4/2014 93.23$ 12/1/2014 $125.30 12/1/2014 92.63$ 12/1/2014 $125.20 12/1/2014 93.14$ 12/1/2014 $122.95 12/1/2014 92.10$ 12/1/2014 $123.06 12/1/2014 92.70$ Average 125.85$ Average 93.89$ Std Dev 2.135198 Std Dev 2.475865 Semi-annual Coupon Payment $3.775 Future Value of Reinvested Coupons $253.00 Par/PV $100 Sale Price $125 Total Future Value $378.00 Payments 1993-2015 42 Reinvest at 2015 YTM (semiannual) 2.1425% Semi-annual return 3.216%
  • 7. The realizedannual returnis6.432%, whichisa lower thanthe yieldtomaturityin1993 of 7.55%. That isassumingthat youcan reinvestthe couponpaymentsat the yieldtomaturityin2015. The yieldtomaturityisa promisedyield. Itcan alsobe describedasanaverage of the yieldsduringthe lifetimeof the bond. The realizedannual returnisamore accurate representationof the returna bondholderwill receive. Yieldtomaturityishigherbecause the interestrate riskisignoredandit assumesthatthe debtis heldtomaturity. In thisexample, the issue issoldbefore the maturitydate (22 yearsinsteadof 100 years). Cost of Call Option The 100 year Disneyissue iscallable after30yearsat 103.020% of par. The bondcan be describedasa 30 year bondwitha 70 year option. What wouldbe the cost of thiscall option? The presentvalue of twoissues,a30 year bondwitha couponrate of 7.55% witha redemptionvalue of $103.02 and another30 yearbondwitha couponrate of 7.25% witha redemptionvalue of $100. The yieldtomaturityis6.97%, the rate fromExhibit 4 for an Agency10+ yearissue. Usingthe time value of money,the presentvalue of the above issueswascalculated: The cost of the “70 YearOption”is$4.14 ($107.64-$103.50). Purchase WhichBond? Suppose thatthe 100 yearbondhas a coupon rate of 7.55% or youcouldpurchase a 30 yearbondat 7.25% couponrate androlloverthatinvestmentin30 years. If you couldreinvestthe savingsfromthe 30 yearbondat the couponrate,you wouldhave $30.91 after 30 years. In orderto refinance the bond,youwouldneed$69.09 after 30 yearsto breakeven. The 70 yearbond musthave a 7.55% couponrate to be comparable tothe previous100 yearissue. That would indicate abreakeveninterestrate of 10.92% annually. The couponrate of the bond in2023 is goingto be much lowerthan10.92% if historical couponpaymentsandinterestrateshold. Therefore itisa betterdeal toinvestinthe 100 yearbond. 30 Year Bond 30 Year Bond with "70 Year Option" N 60 N 60 Coupon 3.625 Coupon 3.775 FV 100 FV 103.02 I/Y 3.485 I/Y 3.485 PV 103.5 PV 107.64
  • 8. InterestRate in 2023 If Exhibit3 (page 12) inthe case isusedinconjunctionwiththe TreasuryYieldCurve displayedabove,it isreasonable toassume thatrates will continuetogodownin the future. It lookslike rateshave peaked in1981 and seemto be fallingbacktowardsthe 4% that wasseenin1963. Evenif after20 yearsthe ratesbeginto increase again,itseemsunlikelythatrateswill goabove 10%. Asdescribedinthe case, RobertJ. Samuelsonbelievesthatthe rise inratesbetween1960 and 1980 wasa resultof government policies. The governmenthaslearnedtheirlessonandwill notallow the ratestobecome ashighinthe future. Fallinginterestratesisfavorable forbondprices. If the ratescontinue tofall,Disneywill be able to use itscall optionsto buyback debtand reissue ata more favorable couponrate. Basedonthis evidence we believerateswill still be relativelylow in2023. 30 Year Issue Coupon Reinvestment Investment Needed to Meet Debt N 60 N 140 I/Y 3.625% PV ($69.09) PMT $0.15 FV $100 PMT $3.78 FV $30.91 I/Y 5.46%