Bonds and Their Valuation

Alot of U.S. bonds have been issued, and we mna LOT!According to

the Federal Reserve, there are about $3.6trion of otstanding U.S.
Treasury securities, more than $1.7 trillif muniipal securities,
almost $2.7 trillion of corporate bonds, and more than$470 billion of bonds
issued by foreign governments and companies in he United States. Not only
is the dollar amount mind-boggling, osthe variey.Bonds come in many
shapes and flavors, with new varietiesintrodceeach year. Two of the most
interesting bonds don t pay anyntest, andone actually has a negative
interest rate.
How can a bond not pay intrest? Aninvestor might buy such a bond today
for $558, and then receive$1,000 nten years. An investor doesn t receive any
cash interest payments,but the en-year increase from the original purchase
price to the $1,000epaymeequals a 6 percent annual return on the investment.
Although here isn any annual cash interest payment, the government
allows corpo ateissuersodeduct an annual interest expense from their taxable
incombased on theinvestor s annual value appreciation. Thus, the company
g atax dduction each year, even though it isn t making actual interest
payments! Ocourse, the downside is that the company will have to come
upwiththe $1,000 per bond in ten years to pay off the bondholders.
To avo dthis large repayment, many companies added a feature that allows
bondhoders to convert their debt into stock if the stock price rises sufficientl
y.
Somessuing companies blindly assumed that their stock price would always
isso they fully expected the debt to be converted. Conversion would dilute
theequity of the original stockholders (there would be more outstanding
shares of stock after converting the bonds), but it would take the company
off the repayment hook, since it wouldn t have to make the $1,000 repayment.
This seemed like the best of all possible worlds: raise billions now, pay no
interest, receive tax breaks each year, and avoid cash payments when the
bonds mature (provided the stock price rises as the companies expected).
However, some companies made a serious mistake by adding yet another
feature to their convertible bonds they allowed investors to demand early
repayment if the stock price didn t rise by a specified amount. Note that the
repayment demand would come at exactly the worst time, since investors
would demand repayment only if the companies were performing poorly! Tyco,
Solectron, Verizon, and Merrill Lynch are a few of the many firms now facing
multi-billion-dollar repayments as a result of this.
For a completely different approach, consider Berkshire Hathaway (chaired
by Warren Buffett), which in 2002 issued bonds with a negative interest rate.
Source: http://www.federalreserve.gov/releases/Z1/current/, Flow of Funds Account
s of the United States, Section
L.2, Credit Market Debt Owed by Nonfinancial Sectors.
bo
up wiTo
paym
ith t
gets
men
me ba
a ta
orate
bas
h the
iss
00 re
e
eive
s, bu
pay
ve $
te
y intetiesntere
mp
so is t
s int
panie
th
d mor
6
lion of
re
e
illio
mean
th
sh
ris
he
omise, so
hold
me issu
oid th
! O
full $
his
Of co
$1
d
dedu
n t
uc
ers tothe
t any
to d
ent e
y a
00
e ten
t?
in te
An in
and
duced
d o
va
ed e
n the
iety.
an $4
Un
unicipa
47
LOT!
outst
T! Ac
Bonds and Their Valuation
Alot of U.S. bonds have been issued, and we mna LOT!According to
the Federal Reserve, there are about $3.6trion of otstanding U.S.
Treasury securities, more than $1.7 trillif muniipal securities,
almost $2.7 trillion of corporate bonds, and more than$470 billion of bonds
issued by foreign governments and companies in he United States. Not only
is the dollar amount mind-boggling, osthe variey.Bonds come in many
shapes and flavors, with new varietiesintrodceeach year. Two of the most
interesting bonds don t pay anyntest, andone actually has a negative
interest rate.
How can a bond not pay intrest? Aninvestor might buy such a bond today
for $558, and then receive$1,000 nten years. An investor doesn t receive any
cash interest payments,but the en-year increase from the original purchase
price to the $1,000epaymeequals a 6 percent annual return on the investment.
Although here isn any annual cash interest payment, the government
allows corpo ateissuersodeduct an annual interest expense from their taxable
incombased on theinvestor s annual value appreciation. Thus, the company
g atax dduction each year, even though it isn t making actual interest
payments! Ocourse, the downside is that the company will have to come
upwiththe $1,000 per bond in ten years to pay off the bondholders.
To avo dthis large repayment, many companies added a feature that allows
bondhoders to convert their debt into stock if the stock price rises sufficientl
y.
Somessuing companies blindly assumed that their stock price would always
isso they fully expected the debt to be converted. Conversion would dilute
theequity of the original stockholders (there would be more outstanding
shares of stock after converting the bonds), but it would take the company
off the repayment hook, since it wouldn t have to make the $1,000 repayment.
This seemed like the best of all possible worlds: raise billions now, pay no
interest, receive tax breaks each year, and avoid cash payments when the
bonds mature (provided the stock price rises as the companies expected).
However, some companies made a serious mistake by adding yet another
feature to their convertible bonds they allowed investors to demand early
repayment if the stock price didn t rise by a specified amount. Note that the
repayment demand would come at exactly the worst time, since investors
would demand repayment only if the companies were performing poorly! Tyco,
Solectron, Verizon, and Merrill Lynch are a few of the many firms now facing
multi-billion-dollar repayments as a result of this.
For a completely different approach, consider Berkshire Hathaway (chaired
by Warren Buffett), which in 2002 issued bonds with a negative interest rate.
Source: http://www.federalreserve.gov/releases/Z1/current/, Flow of Funds Account
s of the United States, Section
L.2, Credit Market Debt Owed by Nonfinancial Sectors.
bo
up wiTo
paym
ith t
gets
men
me ba
a ta
orate
bas
h the
iss
00 re
e
eive
s, bu
pay
ve $
te
y intetiesntere
mp
so is t
s int
panie
th
d mor
6
lion of
re
e
illio
mean
th
sh
ris
he
omise, so
hold
me issu
oid th
! O
full $
his
Of co
$1
d
dedu
n t
uc
ers tothe
t any
to d
ent e
y a
00
e ten
t?
in te
An in
and
duced
d o
va
ed e
n the
iety.
an $4
Un
unicipa
47
LOT!
outst
T! Ac
Technically, Berkshire issued bonds with a 3 percent interest payment, but they
also had
an attached warrant that allows an investor to purchase shares of Berkshire Hath
away
stock at a fixed price in the future. If the stock price rises above the stated
price, then
investors can profit by exercising the warrants. However, Berkshire Hathaway did
n t just
give away the warrants it required investors to make an annual installment payment
equal to 3.75 percent of the bond s face value. Thus, investors receive a 3 percen
t interest
payment, but they must then pay a 3.75 percent warrant fee, for a net in erst ra
teofnegative 0.75 percent. Berkshire Hathaway can deduct the 3 percent inter pay
men fortax purposes, but the 3.75 percent warrant fee is not taxable, further in
craing Bkshire
Hathaway s annual after-tax cash flow.
Think about these and other bonds as you read this chapter.
If you skim through The Wall Street Journal youwill ereferences to a wide variet
y
of bonds. This variety may seem confsing,but inatuality just a few characteristi
cs
distinguish the various types of bonds.
While bonds are often viewed as rltively afeinvestments, one can certainly
lose money on them. Indeed, risk ess long-mU.S. Treasury bonds declined by
more than 20 percent during 199and sae WorldCom bonds declined by 84
percent on one day, June 22002.Inboth of these cases, investors who had
regarded bonds as being rskless, o ateast fairly safe, learned a sad lesson. Not
e,
though, that it is possiblora upimpressive gains in the bond market. High-
quality corporate bondsn1995 provided a total return of nearly 21 percent, and
in 2002, U.S. Treasuybondsreturned 16.8 percent.
In this chapter,we wildiscuss the types of bonds companies and government
agencies issethetermat are contained in bond contracts, the types of risks to
which bothbond vetors and issuers are exposed, and procedures for determining
the valueof and raes of return on bonds.
TopTen U.S. Corporate Bond Issues as of March 2002
Issuer Date Amount (Billions of Dollars)
GE Capital March 13, 2002 $11.0
WorldComa May 9, 2001 10.1
British Telecom December 5, 2000 10.0
Deutsche Telekom June 28, 2000 9.5
France Telecom March 6, 2001 9.0
Ford Motor Credit July 9, 1999 8.6
Ford Motor Co. October 22, 2001 8.5
AT&T March 23, 1999 8.0
AT&T November 15, 2001 7.0
Morgan Stanley April 18, 2001 7.0
aThese bonds were rated investment grade when they were issued in May 2001 at a pr
ice of $1,000 per
bond. Just over a year later, in June 2002, they had been downgraded to junk statu
s, and they were selling
for $130, down 87 percent.
Sources: Deals & Deal Makers: Bond Snapshot/Largest Corporate Bond Issues, The Wal
l Street Journal,
March 15, 2002, C16; and The Wall Street Journal, July 5, 2002, A6.
The textbook s Web
site contains an
Excel file that will
guide you through
the chapter s calculations.
The file
for this chapter is
FM 11 Ch 06 Tool
Kit.xls, and we
encourage you to
open the file and
follow along as you
read the chapter.
FMe-resourcealu
both
ues
su
th bon
f
apte
ue, the
d
reater, w
o
asury
sible
ds in
risk
to
1
25, 2
sk
1994,
20
kle s
4
f borelativ
l
fus
bonds
, you
ing,
ou wi
ncrereas
rest pa
asi
terest
I
TopTT T
nd
nv
d rate
esto
wil
ms tha
or
nds
ll dis
99
ds ret
ack u
5 pr
or atup i
. In
t le
g
safe
b
y
-term
e
safe
m
ut
i
seen act
e ref
g B
en
Berksh
te o
nt for
of
Technically, Berkshire issued bonds with a 3 percent interest payment, but they
also had
an attached warrant that allows an investor to purchase shares of Berkshire Hath
away
stock at a fixed price in the future. If the stock price rises above the stated
price, then
investors can profit by exercising the warrants. However, Berkshire Hathaway did
n t just
give away the warrants it required investors to make an annual installment payment
equal to 3.75 percent of the bond s face value. Thus, investors receive a 3 percen
t interest
payment, but they must then pay a 3.75 percent warrant fee, for a net in erst ra
teofnegative 0.75 percent. Berkshire Hathaway can deduct the 3 percent inter pay
men fortax purposes, but the 3.75 percent warrant fee is not taxable, further in
craing Bkshire
Hathaway s annual after-tax cash flow.
Think about these and other bonds as you read this chapter.
If you skim through The Wall Street Journal youwill ereferences to a wide variet
y
of bonds. This variety may seem confsing,but inatuality just a few characteristi
cs
distinguish the various types of bonds.
While bonds are often viewed as rltively afeinvestments, one can certainly
lose money on them. Indeed, risk ess long-mU.S. Treasury bonds declined by
more than 20 percent during 199and sae WorldCom bonds declined by 84
percent on one day, June 22002.Inboth of these cases, investors who had
regarded bonds as being rskless, o ateast fairly safe, learned a sad lesson. Not
e,
though, that it is possiblora upimpressive gains in the bond market. High-
quality corporate bondsn1995 provided a total return of nearly 21 percent, and
in 2002, U.S. Treasuybondsreturned 16.8 percent.
In this chapter,we wildiscuss the types of bonds companies and government
agencies issethetermat are contained in bond contracts, the types of risks to
which bothbond vetors and issuers are exposed, and procedures for determining
the valueof and raes of return on bonds.
TopTen U.S. Corporate Bond Issues as of March 2002
Issuer Date Amount (Billions of Dollars)
GE Capital March 13, 2002 $11.0
WorldComa May 9, 2001 10.1
British Telecom December 5, 2000 10.0
Deutsche Telekom June 28, 2000 9.5
France Telecom March 6, 2001 9.0
Ford Motor Credit July 9, 1999 8.6
Ford Motor Co. October 22, 2001 8.5
AT&T March 23, 1999 8.0
AT&T November 15, 2001 7.0
Morgan Stanley April 18, 2001 7.0
aThese bonds were rated investment grade when they were issued in May 2001 at a pr
ice of $1,000 per
bond. Just over a year later, in June 2002, they had been downgraded to junk statu
s, and they were selling
for $130, down 87 percent.
Sources: Deals & Deal Makers: Bond Snapshot/Largest Corporate Bond Issues, The Wal
l Street Journal,
March 15, 2002, C16; and The Wall Street Journal, July 5, 2002, A6.
The textbook s Web
site contains an
Excel file that will
guide you through
the chapter s calculations.
The file
for this chapter is
FM 11 Ch 06 Tool
Kit.xls, and we
encourage you to
open the file and
follow along as you
read the chapter.
FMe-resourcealu
both
ues
su
th bon
f
apte
ue, the
d
reater, w
o
asury
sible
ds in
risk
to
1
25, 2
sk
1994,
20
kle s
4
f borelativ
l
fus
bonds
, you
ing,
ou wi
ncrereas
rest pa
asi
terest
I
TopTT T
nd
nv
d rate
esto
wil
ms tha
or
nds
ll dis
99
ds ret
ack u
5 pr
or atup i
. In
t le
g
safe
b
y
-term
e
safe
m
ut
i
seen act
e ref
g B
en
Berksh
te o
nt for
of
212 Chapter 6 Bonds and Their Valuation
WhoIssues Bonds?
A bondis a long-term contract under which a borrower agrees to make payments of
interest and principal, on specific dates, to the holders of the bond. For examp
le, on
January 5, 2005, MicroDrive Inc. borrowed $50 million by issuing $50 million of
bonds. For convenience, we assume that MicroDrive sold 50,000 individual bonds
for $1,000 each. Actually, it could have sold one $50 million bond, 10 bonds wit
h a
$5 million face value, or any other combination that totals to $50 million. In a
ny
event, MicroDrive received the $50 million, and in exchange it promised to make
annual interest payments and to repay the $50 million on a specified maturity da
te.
Investors have many choices when investing in bonds, but bonds are classified
into four main types: Treasury, corporate, municipal, and foreign. Each type dif
fers
with respect to expected return and degree of risk.
Treasury bonds, sometimes referred to as government bonds, are issued by the
U.S. federal government.1 It is reasonable to assume that the federal government
will
In Chapter 1, we told you that managers should
strive to make their firms more valuable, and that
the value of a firm is determined by the size, timing,
and risk of its free cash flows (FCF). This
chapter provides additional insights in how to
measure the risk and return demanded by a firm s
bondholders, which affects the firm s weighted
average cost of capital.
Corporate Valuation and Risk
FCF1
(1 1 WACC)1
Sales
Revenues
Operating
Costs and
Taxes
Required
Investments
in Operations
Financing
Decisions
Interest
Rates
Free Cash Flows
(FCF)
Weighted AverageCost of Capital
(WACC)
Value of the Firm
Value 5
FCF2(1 1 WACC)2
1
FCF3
(1 1 WACC)3
1 1 ? ? ? 1
FCF ¥
(1 1 WACC)¥
Firm
RiskMarketRisk1The U.S. Treasury actually issues three types of securities: bills
, notes, and bonds. A bond makes an equal payment
every six months until it matures, at which time it makes an additional lump sum
payment. If the maturity at the
time of issue is less than 10 years, it is called a note rather than a bond. A T
-bill has a maturity of 52 weeks or less at
the time of issue, and it makes no payments at all until it matures. Thus, bills
are sold initially at a discount to their
face, or maturity, value.
ho Is
1 WACC)
FCF2
ACC)
alue of the Firmalue of the Firm
Cost of Capital
Weighted
Cost of Capital
Risk
Firm
in
Ja
inteA bon
tere
s
nd
ues
(1
1
FCF
W
(W
Cost of Capital
ACC)
verage
Cost of Capital
Market
Risk
Market
Key Characteristics of Bonds 213
Al
sa
Althou
harar
ypes
. Tr
of
ur
asu
ain
o
d
n its
on
dollar,
b
nvest
nd de
p
al riskstor s
osedk ex
ernm
d to
est
defaul
men
rates
st m
lder is
munic
s
oca
s offer
i
al gov
dit risk
p
d. Def
k
opr
fe
of trl
erent
th
on
ly repa
bo
all btract
c
bon
tert ri
k arbond
are in
ype
ds
of
ds.
min
the
hom
nated
i
me cu
def
if the
or fo
ult r
sk.
fore
resare c
p
siden
one
bond
nt
rnm
e maj
ment
e h
t
lt ri
highe
on
isk
Key Characteristics of Bonds 213
Al
sa
Althou
harar
ypes
. Tr
of
ur
asu
ain
o
d
n its
on
dollar,
b
nvest
nd de
p
al riskstor s
osedk ex
ernm
d to
est
defaul
men
rates
st m
lder is
munic
s
oca
s offer
i
al gov
dit risk
p
d. Def
k
opr
fe
of trl
erent
th
on
ly repa
bo
all btract
c
bon
tert ri
k arbond
are in
ype
ds
of
ds.
min
the
hom
nated
i
me cu
def
if the
or fo
ult r
sk.
fore
resare c
p
siden
one
bond
nt
rnm
e maj
ment
e h
t
lt ri
highe
on
isk
e e
214 Chapter 6 Bonds and Their Valuation

An excellent site for

information on many
types of bonds is
Bonds Online, which
can be found at
http://www.bonds
online.com. The site
has a great deal of
information about
corporates, municipals,
treasuries,
and bond funds. It
includes free bond
searches, through
which the user specifies
the attributes
desired in a bond
and then the search
returns the publicly
traded bonds meeting
the criteria. The
site also includes a
downloadable bond
calculator and an
excellent glossary of
bond terminology.
payment, which is fixed at the time the bond is issued, remains in force during
the
life of the bond.2 Typically, at the time a bond is issued its coupon payment is
set at
a level that will enable the bond to be issued at or near its par value.
In some cases, a bond s coupon payment will vary over time. For these floating-
rate bonds, the coupon rate is set for, say, the initial six-month period, after
which it
is adjusted every six months based on some market rate. Some corporate issues ar
etied to the Treasury bond rate, while other issues are tied to other as, such s
LIBOR. Many additional provisions can be included in floating-eissuesFor
example, some are convertible to fixed-rate debt, whereas oth rshave uperand
lower limits ( caps and floors ) on how high or low the ratcan go.
Floating-rate debt is popular with investors who are woried abouthe risk of
rising interest rates, since the interest paid on such bondsncreaseswhenever mar
ket
rates rise. This causes the market value of the debttobe stailzed, and it also
provides institutional buyers, such as banks, with income thatis better geared t
o
their own obligations. Banks deposit costs risth intestrates, so the income
on floating-rate loans that they have made risesatthe samtime their deposit cost
s
are rising. The savings and loan industry wasalmost destroyed as a result of the
ir
practice of making fixed-rate mortgageloansbut browing on floating-rate terms.
If you are earning 6 percent but paying10 perent which they were you soon
go bankrupt which they did. Moreoverfloating-rate debt appeals to corporations
that want to issue longtrmdebt
without committing themselves to paying a
historically high interest rateforthe irelife of the loan.
Some bonds pay no co ons at a l, butare offered at a substantial discount below
their par values and henceproviecapital appreciation rather than interest income
.
These securities arcalled zero coupon bonds ( zeros ). Other bonds pay some
coupon interest,utnot enoughto be issued at par. In general, any bond originally
t, bu
e
b t no
en e
lled
at
upo
pr
te
e for
M
erm de
th
payin
Moreo
y
ge loan
ing 1
y wasans
ises a
as al
ith
se wit
at
inco
ond
bt to
s inc
b
rat
worried
hers
te can
d
g
rs hg-rate
ha
rates,
e i
enoug
zero
gh
ide c
co
all bu
capi
entire
ut
r, f
ithou
pe
loatin
rcent
mos
borro
e samdest
nterest
me
sta
hat i
tabiliz
abo
s wh
ze
go.
out t
up
ues
upper
ch
s. Fo
are
as
offered at a pricesprice gsig nificantlycanntly below its par value is called an
original issue discount
(OID) bond.Corporatinsfirst used zeros in a major way in 1981. In recent years
IBM, Alcoa,CPeney, ITT, Cities Service, GMAC, and Lockheed Martin have used
zerostoraise b lionsof dollars.
Sombonddon t pay cash coupons but pay coupons consisting of additional
bods(or apercentage of an additional bond). These are called payment in kind
onds or justPIK bonds. PIK bonds are usually issued by companies with cash flow
problem,which makes them risky.
me bonds have a step-up provision: If the company s bond rating is downgraded,
then it must increase the bond s coupon rate. Step-ups are more popular in
Europe than in the United States, but that is beginning to change. Note that a s
tep-
up is quite dangerous from the company s standpoint. The downgrade means that it
is having trouble servicing its debt, and the step-up will exacerbate the proble
m.
This has led to a number of bankruptcies.
Maturity Date
bobo
Sobonds
s to r
ome
Alcoa
rai
nd. C
a, JC
Co
gEu
grad
ob
Som
de
, or
blems,
me
r a p
just
b
nds do
per
illi n
don
enne
s
io
ey
tions
Bonds generally have a specified maturity date on which the par value must be
repaid. MicroDrive s bonds, which were issued on January 5, 2005, will mature on
January 5, 2020; thus, they had a 15-year maturity at the time they were issued.
Most bonds have original maturities (the maturity at the time the bond is issued
)
2At one time, bonds literally had a number of small (1/2-by 2-inch), dated coupo
ns attached to them, and on each
interest payment date the owner would clip off the coupon for that date and eith
er cash it at his or her bank or mail it
to the company s paying agent, who would then mail back a check for the interest.
For example, a 30-year, semiannual
bond would start with 60 coupons. Today, most new bonds are registered no physical
coupons are involved, and
interest checks are mailed automatically to the registered owners.
ranging from 10 to 40 years, but any maturity is legally permissible.3 Of course
, the
effective maturity of a bond declines each year after it has been issued. Thus,
MicroDrive s
bonds had a 15-year original maturity, but in 2006, a year later, they will
have a 14-year maturity, and so on.
Provisions to Call or Redeem Bonds
Most corporate bonds contain a call provision, which gives the issuingcorporatio
nthe right to call the bonds for redemption.4 The call provision geny sttsthat
the company must pay the bondholders an amount greater thanhe paralue if
they are called. The additional sum, which is termed a calprmium,isoften set
equal to one year s interest if the bonds are called during hefirst y ar,and the p
remium
declines at a constant rate of INT/N each yearthereafter,where INT 5
annual interest and N 5 original maturity in years Forexample,he call premium
on a $1,000 par value, 10-year, 10 percent bond would generally be $100 if it
were called during the first year, $90 during thsecond yar(calculated by reducin
g
the $100, or 10 percent, premium by one-enth),and so on. However, bonds
are often not callable until several years(generall5to 10) after they were issue
d.
This is known as a deferred call, andthebonds arsaid to have call protection.
Suppose a company sold bonds whninter rtes were relatively high. Provided
the issue is callable, the companycould sellaew issue of low-yielding securities
if
and when interest rates drop.could thn usethe proceeds of the new issue to retir
e
the high-rate issue and thus reduce itinterest expense. This process is called a
refunding operation, and iis disussedin greater detail in Chapter 19.
A call provision is valuable tothe firm but potentially detrimental to investors
.
If interest rates gop, the copany will not call the bond, and the investor will
be
stuck with the iginal coupon rate on the bond, even though interest rates in the
economy havisen sh y. However, if interest rates fall, the company will call the
bond and ayoff invesors, who then must reinvest the proceeds at the current
market erest r which is lower than the rate they were getting on the original
bond.Inotherwords, the investor loses when interest rates go up, but doesn t reap
thegains whenrates fall. To induce an investor to take this type of risk, a new
issue
ocallablebonds must provide a higher interest rate than an otherwise similar iss
ue
ofno callable bonds. For example, Pacific Timber Company issued bonds yielding
9.5pcent; these bonds were callable immediately. On the same day, Northwest
Ming Company sold an issue with similar risk and maturity that yielded 9.2 peren
t,
but these bonds were noncallable for ten years. Investors were willing to
accept a 0.3 percent lower interest rate on Northwest s bonds for the assurance th
at
the 9.2 percent interest rate would be earned for at least ten years. Pacific, o
n the
other hand, had to incur a 0.3 percent higher annual interest rate to obtain the
option of calling the bonds in the event of a subsequent decline in rates.
Bonds that are redeemable at par at the holder s option protect investors against
a rise in interest rates. If rates rise, the price of a fixed-rate bond declines
. However,
Key Characteristics of Bonds 215
of
of
he ga
ca
d. In
ains
inte
ot
av
d pay
re
ve rise
o
orig
is
o up
na
nd i
valua
hu
d it i
. It
ed
ny cocould
when
ould
rs (
d the b
n i
y o
(gene
b
g the
one-te
ond
he sec
s. F
wo
year
or ex
theth
all prhe fi
than
rem
enth
ing
nerally
h
g cor
ce
Mi
nt
5 pMilling
oncal
percen
wh
e bon
r when ra
d
word
i
ate, w
ves
harply.
sto
oupo
ly H
e
omp
scu
to th
ce it
ussed
then
its in
ell a n
use
rest rne
ds
rat
ly 5
re s
, and
1
d g
d year
d
mple,
ener
aft
, th
year,
r, wh
m, is
, an
par
is of
tate
val
ratio
s tha
on
of
of
he ga
ca
d. In
ains
inte
ot
av
d pay
re
ve rise
o
orig
is
o up
na
nd i
valua
hu
d it i
. It
ed
ny cocould
when
ould
rs (
d the b
n i
y o
(gene
b
g the
one-te
ond
he sec
s. F
wo
year
or ex
theth
all prhe fi
than
rem
enth
ing
nerally
h
g cor
ce
Mi
nt
5 pMilling
oncal
percen
wh
e bon
r when ra
d
word
i
ate, w
ves
harply.
sto
oupo
ly H
e
omp
scu
to th
ce it
ussed
then
its in
ell a n
use
rest rne
ds
rat
ly 5
re s
, and
1
d g
d year
d
mple,
ener
aft
, th
year,
r, wh
m, is
, an
par
is of
tate
val
ratio
s tha
on
if holders have the option of turning their bonds in and having them redeemed at
par, they are protected against rising rates. Examples of such debt include Tran
samerica s
$50 million issue of 25-year, 81/2 percent bonds. The bonds are not callable by
the company, but holders can turn them in for redemption at par five years after
the
3In July 1993, Walt Disney Co., attempting to lock in a low interest rate, issue
d the first 100-year bonds to be sold by