Surname

Student’s Name:

Professor’s Name:

Course:

Date

Case Tombstones

Capital markets provide corporations with a varied range of options for raising capital.

The 2008-2009 financial crisis was one of the worst economic tragedy as it occurred despite the

m
er as
measures that had been put in place to prevent it. The Gramm-Rudman Act which had allowed

co
eH w
banks to participate in trading profitable derivatives which they sold to investors was one of the

o.
rs e
factors that contributed to this crisis. Some of the companies which were affected by the 2008 to
ou urc
2009 financial crisis in the United States of America included banking industries, big insurance
o

companies in the country, mortgage lenders, and other large companies. The insurance
aC s
vi y re

companies, for instance, got tangled up in this crisis by trading in “credit default swaps” which

was put in place by insurance policies. After the financial crisis of 2008 and 2009, most
ed d

companies faced major financial challenges. This essay discusses the issues facing Microsoft
ar stu

Corporation, Coca-Cola Enterprises, Norfolk Southern, Ford Motors, Cephalon, and

is

International Business Machines Corporation.

Th

Microsoft Corporation Notes

sh

Reasons why MSFT is Raising Money

Microsoft Corporation (MSFT) is raising money through four series of senior unsecured

notes which were each paying a coupon that was to mature between 2013, 2015, 2020, and 2040

This study source was downloaded by 100000835385220 from CourseHero.com on 12-05-2021 08:37:09 GMT -06:00

https://www.coursehero.com/file/29502007/Case-Tombstonesdocx/
 Surname

which made them issue 4.75 million dollars. MSFT is raising this money because it wishes to use

it for general corporate functions that may entail funding of working capital, company

expenditures, and expenses used on repurchases of acquisitions and stock[Lue12].

Whether or not the Paper is Really Cheap and YTM for each Issue

This paper is really cheap. This is because the YTM (yield to maturity) that is expected

from this paper for all the four series is quite low when compared to their respective Treasury bill

yield rates. The yield to maturity is the rate of return placed on a bond and is computed as the

internal rate of return of cash flow comprised of the interest payments, purchase price, and the

m
er as
principal payments within the time before the maturity of the bond. The YTM for each of the

co
eH w
four issues are 0.917% YTM for 2013, 1.701% YTM for 2015, 3.093% YTM for 2020, and

o.
4.566% YTM for 2040 [Lue12]. rs e
ou urc
Reasons Why MSFT Differs from Coupon Rate and its Appropriate Comparison
o
aC s

YTM rate is the total return which is anticipated on a bond in case the bond is held until
vi y re

the end of its maturity date. On the other hand, the coupon rate is the amount of interest that is
ed d

paid every year which is calculated as a percentage of the face value of the bond. Coupon rates
ar stu

are paid by fixed-income security. For this reason, the YTM differs from the coupon rate because

its issued price differs from the face value of each of the unsecured notes. The YTM could be
is

compared with the returns that are made from the bonds[Lue12].
Th

Reasons why MSFT Issued Four Papers Instead of One

sh

The Microsoft Corporation issued four papers instead of one because each of the four

papers had a different maturity time. The different maturity time would allow MSFT to take

advantage of the changing interest rates in the market (market dynamics) over the years that the

This study source was downloaded by 100000835385220 from CourseHero.com on 12-05-2021 08:37:09 GMT -06:00

https://www.coursehero.com/file/29502007/Case-Tombstonesdocx/
 Surname

debts would take to mature, allowing them to acquire more profits as compared to if they would

have chosen to use one note. Aside from this, the Microsoft Corporation also issued four

different papers instead of one in order to allow different companies to be able to purchase the

note that as most suitable for them. By giving them more options MSFT would be able to easily

obtain maximum profit from the four different notes that what they would obtain by using only

one note [Lue12].

Redeeming of Notes

No, I do not expect those notes to be called or redeemed. This is because those notes were

m
er as
issued during a time when the company was at its lowest yield for unsecured debt, thus it was in

co
eH w
no situation to raise debt at that rate in future[Lue12].

o.
rs e
ou urc
Coca-Cola Enterprise Notes

YTM for Coca-Cola Enterprise Issue and the Difference between the Notes
o
aC s
vi y re

The Coca-Cola Enterprises which is the leading bottler of Coca-Cola beverages issued

senior unsecured notes amounting to 600 million dollars in 2009 which was due in 2012 and
ed d

2015. The YTM for the Coca-Cola Enterprise issue is 3.75% in 2012 and 4.25% in 2015. The
ar stu

Coca-Cola Enterprises just like MSFT has unsecured noted. Although they notes differ from
is

those of the MSFT because they are redeemable. A redeemable bond is different from an
Th

unredeemable bond in terms of the ability of the issuer to redeem the note before its maturity

date, though under specific conditions. The bonds when issued will show when they can be
sh

redeemed and the price required for redeeming them. The MSFT notes have a credit rating which

is provided on the issue date of AAA (S&P). On the other hand, the credit rating of CCE are A3

This study source was downloaded by 100000835385220 from CourseHero.com on 12-05-2021 08:37:09 GMT -06:00

https://www.coursehero.com/file/29502007/Case-Tombstonesdocx/
 Surname

and are rated by Moody’s. The yield to maturity period for MSFT notes are 3,5,10, and 40 years

while those provided by Coca-Cola Enterprise are 3 and 6 years[Lue12].

Default Risk for Coca-Cola Enterprise Note

Based on Moody’s investor services, Coca-Cola Enterprise has an A3 rating which is a

stable outlook. Instruments which have an A3 rating are considered to have a moderate degree of

safety in regards to timely payment of financial responsibilities as they carry higher risks of

credits when compared to those rated in the higher categories [Lue12].

m
Reasons for Raising Funds at Coca-Cola Enterprise

er as
co
eH w
Just like the other companies which had been affected by the financial disaster of 2008 to

o.
rs e
2009, the Coca-Cola Enterprises also faced this tragedy. According to the SEC filing, the Coca-
ou urc
Cola Enterprises is raising money which it plans to use as the proceeds to pay down

debts[Lue12].
o
aC s
vi y re

Norfolk Southern Century Bond

Reasons for Reopening the Issue to Raise an Additional $250M at Norfolk

ed d
ar stu

In August 2010, Norfolk Southern Railroad (NSR), “reopened” the 100-year bond which

had a=originally been issued in 2005. They “reopened” this issue in order for them to be able to
is

raise another 250 million dollars as it was observed that NSC was paying an increase of about
Th

0.75% on its century bond that it was supposed to pay on the newly issued bond of 30-
sh

years[Lue12].

Question on the Existence of NSC in 2105

This study source was downloaded by 100000835385220 from CourseHero.com on 12-05-2021 08:37:09 GMT -06:00

https://www.coursehero.com/file/29502007/Case-Tombstonesdocx/
 Surname

I think NSC is going to be around in 2105 as it had issued a bond that matured after 100

years. This by itself is an assurance that the company will be around in 2105 and that it is

confident in its operations. This matters because if the company closes it businesses before 2105

and is declared bankrupt, its bond owners will not be able to get their dues. Aside from this, the

Norfolk southern company had also considered redeeming the notes prior to their maturity either

in who or in part [Lue12].

Century Bonds

Century bond is brought by specific institutional investors in order to increase the

m
er as
duration of the bond portfolios and be able to fulfill certain goals which may be time-sensitive.

co
eH w
Century bonds are not seen as often as the other types of bonds which take a shorter time because

o.
rs e
most investors would not be willing to buy bonds that will most likely exceed their life
ou urc
expectancy and that of their company. Aside from this, buying a 100-year bond would require
o

one to believe that the company would last that long in order to pay its dues. NSC would most
aC s
vi y re

likely recommend these bonds in a case where the interest rates in the market will be below the

coupon rate being offered by the bond [Lue12].

ed d
ar stu

International Business Machines Corporation Floating Rate Note

Different Factors about this Issue

is
Th

The International Business Machines Corporation (IBM) sold floating rate notes worth of

one million dollars. A floating rate note is a bond which has a variable coupon, in that each of the
sh

coupon’s payment is linked to the predominant level of an underlying index. An example is the

3-month LIBOR (The London Interbank Offered Rate meant for bonds, the interest rates that the

most creditworthy international banks charge each other for short-term loans in the Euro and

This study source was downloaded by 100000835385220 from CourseHero.com on 12-05-2021 08:37:09 GMT -06:00

https://www.coursehero.com/file/29502007/Case-Tombstonesdocx/
 Surname

dollar market) offered by IBM. The difference between this and the other issues that have been

addressed in this paper is the changing interest rate which is paid quarterly on the debt. This

differs from the other issues which have fixed interest rates[Lue12].

International Business Machines Corporation Rate and its Comparison

The floating rate for the International Business Machines Corporation issue is LIBOR

plus 0.03 percent. This rate should be compared with the three-month US Treasury bill [Lue12].

Reasons why the International Business Machines Corporation is Raising Funds

m
er as
After the economic disaster of 2008-2009 that affected many companies. It was essential

co
eH w
for companies to come up with ways of raising funds to be able to manage their corporate

o.
rs e
functions. The International Business Machines Corporation is raising funds in order to use the
ou urc
profits from these funds for general corporate purposes in the company[Lue12].
o

Cephalon Convertible Notes

aC s
vi y re

How Convertible Notes Work

The Cephalon biopharmaceuticals makers issued 350 million dollars in convertible senior
ed d
ar stu

subordinated notes which were due in 2014. A convertible senior subordinate note is a bond

which lasts for a short-term and is convertible (meaning that it can easily be exchanged for
is

common stock at the discretion of the company or individual who was the bondholder).
Th

Basically, in the case of a convertible note, the investor loans money (as a way of planning for
sh

the future financial years or plans) usually to a startup company and instead of getting a return in

the form of principal plus the investor's interests, the investor receives equity in the company.

The convertible subordinate note ranks below other loans and thus is subordinate to other debts.

This study source was downloaded by 100000835385220 from CourseHero.com on 12-05-2021 08:37:09 GMT -06:00

https://www.coursehero.com/file/29502007/Case-Tombstonesdocx/
 Surname

After converting these notes, the company pays cash and in other cases, the company may be

allowed to deliver shares based on a daily conversion price which is calculated on a

proportionate basis for each day (or each trading day) of the conversion period[Lue12].

How a Small No-Name Company Managed to Issue a Debt at 2.5% When Coca-Cola

Had to Pay 4.25%

A small no-name company managed to issue a debt at 2.5% while Coca-Cola needed to

pay 4.25% through the use of the convertible senior subordinated notes. Since the small company

issued convertible senior subordinated notes that ranks below other debts it would be able to

m
er as
issue a debt at 2.5%. Besides, in the event that the issuer becomes bankrupt and liquidates all its

co
eH w
assets, as a subordinate convertible note, this note would be repaid after other debts securities

o.
rs e
have been cleared. Just like other debt securities, the convertible subordinated note will be repaid
ou urc
before stock [Lue12].
o
aC s

Participating in an Upside
vi y re

An upside is the predicted dollar amount or its percentage increase in the price of an
ed d

investment. An upside can be determined through different analysis methods such as technical or
ar stu

fundamental analysis. When a company has a higher upside, this implies that the stock has more

value than what is currently reflected in the stock price. An investor can participate in an upside
is

by giving up their notes for conversion at any point of time before the maturity of their bond.
Th

Some of the circumstances that may warrant surrendering up of the notes by a company include
sh

surrendering the noes during any calendar quarter beginning after June 30, 2009 if the closing

sale of the company’s common stock, for at least a period of 20 trading days in the periods of 30

consecutive trading days which end on the last trading day of the calendar quarter immediately

This study source was downloaded by 100000835385220 from CourseHero.com on 12-05-2021 08:37:09 GMT -06:00

https://www.coursehero.com/file/29502007/Case-Tombstonesdocx/
 Surname

following the calendar quarter in which the conversion occurs is at least more than 130 percent

of the conversion price per share of the notes in effect on the final trading day [Lue12].

Another reason that could warrant giving up the notes by a company would be during the

10 consecutive trading days period which follow after every five consecutive trading day period

whereby the trading prices for the notes for each of these trading days was less than ninety-eight

percent of the closing sale price of the company’s common stock on that date multiplied by the

then current conversion rate[Lue12].

Alternatively, a company could make specific significant contributions to some of the

m
er as
holders of their common stock making them enter into specified business transactions or when

co
eH w
their common stock is not listed on the United States national security exchange. In cases in

o.
rs e
which a bondholder may wish to surrender their notes after November 1, 2013, they are allowed
ou urc
to surrender them for conversion at any time before the close of the business on the second
o

scheduled trading day immediately after the maturity date irrespective of whether any of the
aC s
vi y re

foregoing conditions stated at the beginning have been satisfied [Lue12].

ed d
ar stu
is
Th
sh

This study source was downloaded by 100000835385220 from CourseHero.com on 12-05-2021 08:37:09 GMT -06:00

https://www.coursehero.com/file/29502007/Case-Tombstonesdocx/
 Surname

Works Cited

Luehrman, Timothy A., and David Lane. "Tombstones." Harvard Business School (2012): 1-15.

m
er as
co
eH w
o.
rs e
ou urc
o
aC s
vi y re
ed d
ar stu
is
Th
sh

This study source was downloaded by 100000835385220 from CourseHero.com on 12-05-2021 08:37:09 GMT -06:00

https://www.coursehero.com/file/29502007/Case-Tombstonesdocx/
Powered by TCPDF (www.tcpdf.org)