AMR - American Airlines Case Study Report

AMR - American Airlines Case Study Report Name Institution Date Introduction In valuation of assets the risk profile, required rate of return and timing of the cash flows are considered. Valuation refers to estimation of an asset worth and bonds (fixed income) are one category of asset the required rate of return is the sufficient rate to compensate one for their investment over a period of time. In valuing bonds, the present value of interest and present value of maturity are considered. The paper will focus on the valuation of bonds, which are debt instruments, highlighting how the time to maturity at 10 years, 20 years and 30 years and interest rate at 8% and 12% affect the bond prices. a] Ignoring floatation costs, what will the bonds sell for today if American decides to issue the bonds with a maturity of 10 years? What will the price be if the bonds have a maturity of 20 years? 30 years? When interest rates and coupon rates are equal, bond prices are not affected by duration of the bond and payment of interest times in a year. The bond prices will still remain at $ 1,000. b] If the bonds are issued with 10 years to maturity and the day after they are issued, the market interest rates increase to 12%, what will be the price of American Airline's bonds? What if interest rates drop to 8%? FV= $ 1,000, PMT=50, N=10, i=12%- (Solve, PV=$885.30 FV= $ 1,000, PMT=50, N=10, i=8% ( Solve, PV= $ 1,135.90 Face value1000Coupon rate10%Number of compounding periods per year2Interest per period50Number of years to maturity10Number of compounding periods till maturity20Market rate of return/Required rate of return12%Market rate of return/Required rate of return per period0.06Bond Price$885.30 Face value1000Coupon rate10%Number of compounding periods per year2Interest per period50Number of years to maturity10Number of compounding periods till maturity20Market rate of return/Required rate of return8%Market rate of return/Required rate of return per period0.04Bond Price$1,135.90 Using MS Excel, when the interest rate of return is 12% the bond price $885.30, and when the required rate of return is 8% $1,135.90. When there is semi-annual compounding the value of the bond is lower than annual compoundin...