In this case, Janet O’Brian, a staff working in Wilson Family’s Foundation needs to make investment recommendations on several corporate bonds to the foundation’s Investment Committee.
The key is on uncovering possible mispricing (either underpriced or overpriced) & the drivers of the mispricing. The bond earns an “attractive” rate of return if its yield is greater than the benchmark rate, or is “underpriced,” thus a bargain. (The bond earns a “poor” rate of return if its yield is less than the benchmark rate, or is “overpriced,” thus should be avoided.)
The key concepts include bond valuation, bond yields, default risk premium, credit ratings, and risk-return etc. (Please refer to textbook chapter 8 on bond valuation.)
Please provide detailed answers to the following questions:
1. How is the bond market like at the end of 2018? (Page 1-2) What is the expectation of interest rate movements & the economy for 2019?
2. Based on these expectations, what kind of bonds are more attractive for investment? Why? (p.2-3)
3. Referring to Appendix of the case (page 10), what factors are taken into considerations when S&P Credit Ratings assign bond ratings?
4. Please complete the attached excel file, which contains three tables are provided. Please complete the portions that are highlighted with yellow color. Answer the following questions after completing the excel file:
1) Assuming the reported credit ratings are correct & that the market yields for those ratings are appropriate expected returns (benchmarks) for the bonds, quantify the attractiveness of the bonds: how does the yield compare to the benchmark (Exhibit 5 in p.8)
2) Janet O’Brian suggests that the bond ratings are incorrect. Assuming that O’Brian’s alternative ratings (a full category improvement) are correct and that the market yields for those ratings are appropriate expected returns for the bonds, once again quantify the attractiveness of the bonds in two ways: how does the yield compare to the benchmark? How does the current price compare to the benchmark-yield implied price?
3) Which bond(s) do you recommend based on the above analysis?
