How Much I Would Pay for a Bond Offered by Coca-Cola - Essay Example

The paper “How Much I Would Pay for a Bond Offered by Coca-Cola" is an affecting example of an essay on finance & accounting. In the hypothetical scenario, I have been asked to assume that Coca-Cola is offering a bond of the face value of $2,000 which will mature in one year. That means it will be redeemed at $2,000 a year from today. Given the concept of the time value of money, I would definitely want to purchase this bond at an amount less than $2,000. How much I would be willing to pay for the bond would depend on the rate of interest being offered, the number of interest payments (whether quarterly, half-yearly or annually) and the prevailing interest rates in the market. It has been seen empirically that bond prices and debt market interest rates travel in opposite directions. When the interest rates are high and going up in the debt market, Coca-Cola would have a difficult time attracting attention to its bond issue and would have to offer it at a discount (Mathur, 1979). Let’s say the prevailing interest-free rate on US Treasury bills is 7 percent. This means that the company would have to offer the bonds at a discount in excess of the risk-free rate, say 10 percent. In other words, I would agree to pay $2000- 200, or $1800 for the bond. We can also use the formula: Coupon Value * (1-[1/1 + interest ^ number of payments] /interest) + face value /(1 + interest ^ number of payments).

Discount Rate for the Bond: $200/$2000 x 100 = 10 percent. Of course, this would also be affected by the number of interest payments per year and the number of years to maturity. In periods of falling interest rates, purchasers of bonds would like to be offered a discount when buying these debt instruments. However, bonds can also be issued at a premium if the company has a good reputation in the market. A company would only go for a bond issue if it is finding it hard to attract capital through the primary and secondary equity markets or where the issue of further capital would lead to control issues. On the other hand, issuing bonds creates debt obligations like interest payments.  

Buying Bonds of Competitor Firms at a Premium or Discount: Regarding the case where I would prefer to buy bonds at a premium or a further discount as compared to Coca-Cola, I would prefer to buy Pepsi bonds at a premium and that of the Snapple Group or Doctor Pepper at a discount. This is because the battle for dominance between Pepsi and Coca-Cola is well known. At one point in time previously, Coca-Cola made a wrong move by seeking to rebrand the original mixture as Classic Coke and the modern version as New Coke or Coca Cola. This was not appreciated by the public and some even switched brands when they heard that Coke had sought to change the original formula and taste of their bestseller. The backfiring of this move saw Pepsi capture some of Coke’s market share and the experiment had to be abandoned. So I believe that it would be worthwhile to invest in Pepsi at a premium, this being Coke’s worthy and closest competitor.

Looking at the discount option, I would prefer to invest in Dr. Pepper or the Snapple’s Group at a further discount, as I believe it has a long way to go in terms of both taste and popularity before it hopes to catch up with Coke, Pepsi or the Nestle Group. Still, in order to invest the remainder of the amount in the beverage or soft drink industry, these are the firms to invest in this industry sector.    

What I have learned in Module 2 SLP: Through this module, I have learned that bonds can be offered at par, a premium or a discount, just like shares. There is an inverse relationship between interest rates and bond prices. As a bond approaches maturity, its price also tends to match its maturity or face value. This is also brought out by the YTM or Yield to Maturity formula (Rao, 2011).