Harvard Business School

Answer the following questions based on given Case Study.

The Case study is: "Walt Disney Company's Sleeping Beauty Bonds".

Questions
Recommended: choose a business situation for which the analysis of the Sleeping Beauty bonds is relevant. Use this to define your perspective, presentation, recommendations, etc. and write a professional document. The following questions are only meant to guide your analysis - they might not call for a direct answer!

1. Set up a spreadsheet (or, more conveniently, several of them but in the same workbook so that you do not need to reenter the data) that can be used for various yield, price, duration and convexity calculations.

2. What does it mean that the bonds were issued at par and what was their initially yield? Suppose that the yield-to-maturity of the bonds falls and rises by 100 bpts, respectively. Calculate the corresponding prices. Are these prices appropriate measures of the bonds' value?

3. Extract a current yield curve from a business daily (WSJ, FT) that is appropriate for the valuation of the Sleeping Beauty bonds. State clearly any assumptions that you make about the yield curve, the bonds or Walt Disney Company's repayment strategy.

(a) Find the current listed price of the Sleeping Beauty bonds and calculate their current yield-to-maturity (YTM).
(b) Calculate the current fair price on the basis of your yield curve. Pay attention to dates and time horizons.
(c) Explain why current listed and current fair price might differ.
(d) Assume that the whole yield curve shifts up by 50bpts in a parallel fashion. What is the new price?

4. Relate bond price changes to duration and convexity and explain how to use these concepts for interest rate risk measurement and management purposes.

5. What is the difference between duration and maturity? Calculate the bonds' duration on the basis of your previously derived YTM and your yield curve. Which one is the better duration measure and why?

6. Calculate the bonds' convexity and explain the concept. How does it relate to duration? If the bonds' yield fell or rose by 75 bpts, respectively, by what amount would you expect the price to vary in each case? Provide both a first- and second-order approximation to the expected price change.