Module 2 SLP Assignment
March 6, 2014
Buying a $100,000.00 Michael Kor's Corporate Bond
The purpose of this second SLP's assignment is to take the previously learned concepts of Time Value of money and then decide how much I would personally be willing to pay for a $100,000.00 bond from Michael Kor's. I will explain my thought process by taking into consideration my own personal risk preferences, interest rates, inflation and what the probability of being paid back might be.
Next, a discussion about what the discount rate for $100,000.00 Kor's bond will be explained by using the present value formula from the background readings . In addition to that two other ...view middle of the document...
PV = 95,240
The reason I would pay par value for a $100,000 Kor's bond is because Kor's is growing faster than any other company in the same said business. They are opening 65 stores a year globally that have same store sales growing company wide at an average of about 25%, and in addition to that they are experiencing a 50% growth year over year in Europe. (Kors)
Other factors include the fact that Kor's has no debt and show a 47% return on equity which means the company is extremely well managed. They also have the highest profit margin at 20% which I have color coded in green along with the highest liquidity ratios which shows that they are capable of covering their short term debt without any problems. Even though Kors has the highest beta (color coded in red), @1.68 this beta simply shows its stock prices volatility in relation to the rest of the market. Put another way, if a stock has a beta greater than 1 then it should have greater price volatility than the overall market and therefore a will probably be a bit riskier. (Little).
Overall, the higher beta Kors is showing has little bearing on my decision to buy their bond at par due to its profitability and significant gains its shown year after year. I also believe that since the bond is for such a short period of 12 months that Kors will be very likely to make good on the investment. After all, The "discount" in a discount bond doesn't necessarily mean that investors get a better yield than the market is offering, just a price below par.(Harper, 2012)
Discount rate: According to the key statistics listed above about Kors, I would be willing to pay par value $100,000.00 for this bond at a rate of 5% for 1 year even though its beta rating was stated as the riskiest because I took other more important factors into consideration as mentioned above and so the calculations for this bond price is essentially derived by adding the PV of interest payments ($4762.00) plus the PV of the Bond Principal payment at the end of year 1 = ($95,238.00). Next, I would pay less for Ralph Lauren's bond because I would be getting the deepest discount of 7% based on its...