Contingent Convertible Bonds Discussion Questions

Question Description

Question 1

A corporate investor wants to increase the yield on their investment holdings. They currently have no tech names in their portfolio. The debt capital markets team pitches Apple, which is AA rated. The investor thinks the yield on this bond is too low, but likes the Apple name. What could the debt capital markets’ team do to solve this issue? If they do that, explain what would be needed to make this solution come to reality. Explain any constraints that this process has.

Question 2

IBM wants to raise money via a bond issue. The debt capital markets’ team is hearing from investors that they want to buy a premium bond. The investors are asking for a bond to be priced at a 105% level. The par bond for this issuance would have had a 3% yield and a 3% coupon. Its duration would be 10. What coupon would the premium bond need to be issued at

Question 3

a)If a bond has a yield volatility of 100 bps and a duration of 20, what can you tell me about the likelihood that its price is 80% in 1-year’s time? (You don’t need an exact number here – but walk me through what the numbers are telling you). What other price has this same probability?

b)If the volatility decreases to 50 bps, is it more or less likely that the bond trades below 80% in 1-year’s time? Why

Question 4

You own a convertible bond on Moderna Pharmaceuticals.

Through your MRNA technology, you develop a vaccine for the COVID19 virus.

Discuss the various risk factors you have with a convertible bond and how this may affect these factors. Overall, do you think you made or lost money after this report was issued?

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