CORPORATE BOND ANALYSIS
Assignment No. 1 – Fall 2014
A. GENERAL BOND AND INVESTOR INFORMATION
1. 3M and Fixed Rt, Ser F 1 3/8s 2016
a. 3M is a technology company. Co.’s segments are: Industrial, providing tapes, a range of coated, non-woven and bonded abrasives, and adhesives among others; Safety and Graphics, providing personal protection products; and traffic safety and security products among others; Electronics and Energy, providing LCD computer monitors, LCD televisions, and automotive displays among others; Health Care, providing medical and surgical supplies, skin health and infection prevention products, and food safety products among others; and Consumer, providing office supply products, stationery products, and home care products among others.
b. Fixed Rate, Series F 1.375 bond is a bond issued by 3M in late 2011 to raise 1 billion dollars. This bond has a fixed rate of 1.375% and the coupon is paid semi-annually. This bond is not convertible or callable. It’s maturity date is September 29th, 2016. This bond is rated by Moody’s as Aa2 and by Standard and Poor’s as AA-.
B. EVALUATION OF THE CORPORATE BOND’S UNSYSTEMATIC RISK
1. Corporation’s Ability to Repay Principal
a. Key Financial Ratios:
|
Years:
|
Dec13
|
Dec12
|
Dec11
|
Dec10
|
Dec09
|
|
Current Ratio
|
1.698
|
2.198
|
2.250
|
2.006
|
2.204
|
|
Interest Coverage Before Tax
|
46.255
|
38.140
|
33.425
|
29.632
|
22.151
|
|
Long-Term Debt/Common Equity (%)
|
25.049
|
28.376
|
29.591
|
27.306
|
40.771
|
|
Total Debt/Total Assets (%)
|
18.083
|
17.924
|
16.590
|
18.391
|
21.347
|
Key Financial Ratio difference between Years:
|
Years:
|
Dec13
|
Dec12
|
Dec11
|
Dec10
|
Dec09
|
|
Current Ratio
|
(0.500)
|
(0.051)
|
0.244
|
(0.198)
|
0.561
|
|
Interest Coverage Before Tax
|
8.115
|
4.716
|
3.793
|
7.481
|
(2.607)
|
|
Long-Term Debt/Common Equity (%)
|
(3.327)
|
(1.216)
|
2.285
|
(13.465)
|
(12.109)
|
|
Total Debt/Total Assets (%)
|
0.159
|
1.334
|
(1.801)
|
(2.956)
|
(5.177)
|
b. Compare these results to industry standards available from published sources orpreferably compare to the industry leader (sales/revenue) [or number two (sales/revenue) in the industry if you are analyzing the industry leader] based on financial ratios from the ALADIN databases, et. al.
c. In addition, include an evaluation of the company’s ratios, from B.1.a, over time, what is commonly referred to as trend analysis.
2. Corporation’s Ability to Pay Interest Same procedure as in 1 above.
Note: As per our class discussion, Standard & Poor’s Bond Guide, (both hard copy and in their database) provides information about an interest coverage ratio, and calculates this value over several years.
3. Credit Position of the Company ( If you can, could you answer for this question)
a. Discuss the debt-paying experience of the company. (Use the information about this company’s current and historic bond ratings.)
b. Has the company ever defaulted?
c. What is the character of the issuing corporation?
C. EVALUATION OF THE CORPORATE BOND’S INVESTMENT RETURN AND
SYSTEMATIC RISK
1. Determine the Yield-To-Maturity (YTM) based on quarterly periods
Since this bond is started from August 2012, so my teacher said I need to determine the YTM based on every month, so I adjusted, the following tables which are right, please use these sources for the answers !!!)
|
Quarterly Periods
|
Current Yield
|
YTM
|
Price
|
|
31-Aug-12
|
1.34%
|
0.73%
|
102.56
|
|
30-Sep-12
|
1.34%
|
0.73%
|
102.55
|
|
31-Oct-12
|
1.34%
|
0.71%
|
102.60
|
|
30-Nov-12
|
1.34%
|
0.75%
|
102.45
|
|
31-Dec-12
|
1.34%
|
0.80%
|
102.26
|
|
31-Jan-13
|
1.35%
|
0.85%
|
102.05
|
|
28-Feb-13
|
1.35%
|
0.93%
|
101.79
|
|
31-Mar-13
|
1.34%
|
0.75%
|
102.41
|
|
30-Apr-13
|
1.34%
|
0.75%
|
102.41
|
|
31-May-13
|
1.34%
|
0.51%
|
102.58
|
|
30-Jun-13
|
1.35%
|
0.73%
|
101.92
|
|
31-Jul-13
|
1.37%
|
1.15%
|
100.65
|
|
31-Aug-13
|
1.36%
|
0.90%
|
101.39
|
|
30-Sep-13
|
1.36%
|
1.00%
|
101.11
|
|
31-Oct-13
|
1.35%
|
0.78%
|
101.77
|
|
30-Nov-13
|
1.35%
|
0.67%
|
102.09
|
|
31-Dec-13
|
1.35%
|
0.67%
|
102.09
|
|
31-Jan-14
|
1.35%
|
0.88%
|
101.48
|
|
28-Feb-14
|
1.35%
|
0.75%
|
101.63
|
|
31-Mar-14
|
1.35%
|
0.74%
|
101.88
|
|
30-Apr-14
|
1.35%
|
0.75%
|
101.83
|
|
31-May-14
|
1.35%
|
0.46%
|
101.8
|
|
30-Jun-14
|
1.35%
|
0.39%
|
101.97
|
|
31-Jul-14
|
2.10%
|
2.70%
|
95.06
|
|
30-Aug-14
|
1.36%
|
0.63%
|
101.46
|
2. Look-up Bond Yield Averages for the corresponding nineteen quarterly periods (available in either Standard & Poor’s Bond Guide or MERGENT’s Bond Record as per handout example) by the same bond rating classification.( This is good)
|
|
Monthly
Periods
|
YTM Aa
|
YTM-3M
|
|
|
August 2012
|
3.61%
|
0.73%
|
|
|
September 2012
|
3.68%
|
0.73%
|
|
|
October 2012
|
3.63%
|
0.71%
|
|
|
November 2012
|
3.57%
|
0.75%
|
|
|
December 2012
|
3.70%
|
0.80%
|
|
|
January 2013
|
3.87%
|
0.85%
|
|
|
February 2013
|
3.95%
|
0.93%
|
|
|
March 2013
|
3.97%
|
0.75%
|
|
|
April 2013
|
3.77%
|
0.75%
|
|
|
May 2013
|
3.94%
|
0.51%
|
|
|
June 2013
|
4.32%
|
0.73%
|
|
|
July 2013
|
4.46%
|
1.15%
|
|
|
August 2013
|
4.63%
|
0.90%
|
|
|
September 2013
|
4.69%
|
1.00%
|
|
|
October 2013
|
4.59%
|
0.78%
|
|
|
November 2013
|
4.67%
|
0.67%
|
|
|
December 2013
|
4.68%
|
0.67%
|
|
|
January 2014
|
4.53%
|
0.88%
|
|
|
February 2014
|
4.46%
|
0.75%
|
|
|
March 2014
|
4.44%
|
0.74%
|
|
|
April 2014
|
4.33%
|
0.75%
|
|
|
May 2014
|
4.20%
|
0.46%
|
|
|
June 2014
|
4.26%
|
0.39%
|
|
|
July 2014
|
|
0.49%
|
|
|
August 2014
|
|
0.63%
|
3. Utilizing EXCEL, (this is also available at our Computer Lab) complete the following statistical analysis: (Note: The best and most succinct discussion on using and interpreting EXCEL is the statistics text STATISTICS for BUSINESS and ECONOMICS, authored by Anderson, Sweeney, Williams, 2012, SOUTH-WESTERN CENGAGE Learning. ISBN 13: 978-0-538-48165-6)
a. Enter the two sets of data.( This answer is same as previous one, do you think wo sets of data is that)
You used before average instead the YTM-Aa, my teacher said since I do monthly instead quarterly, I do not need Average number.
b. Evaluate your data by using EXCEL to compute:
1) DESCRIPTIVE STATISTICS ( I think it is right I adjusted what you did)
2) SCATTERPLOTS ( Please change it for me like a form attached see the 2nd attachment)
3) REGRESSION ANALYSIS ( You answered that question before, but since I do monthly, I need to adjust your previous answer, but I have problem understanding your answer from 3-5. Since you did before, could do do it over using monthly numbers and please!!!)
Note: Make certain that the regression coefficients (a and b in the equation y = a + bx) in C.3.b.2) and C.3.b.3) are equal, frequently errors are made in these EXCEL applications which result in switching the dependent variable and independent variable.
4. Analyze the output for both sets of data, be certain to evaluate and discuss the statistical significance of the slope (b in the equation y = a + bx) and the coefficient of determination (r2). Use a 10% (.10) level of significance for each variable. (Include all statistical computer output in your report.)
5. Calculate and interpret, for your bond, the current and modified duration. (Include the spreadsheet output in your report.)
D. IS THE BOND RATING ACCURATE? (Also could you answer this question)
Read the definition of the rating given to the bond you are analyzing and compare it to your findings in A C with the objective of determining if the bond rating is accurate.
Be certain to draw on the information you have presented in B. for this section of the paper.
