Case: Tombstones

1.MSFT Notes:

a. Why is MSFT raising money?

Microsoft is raising funds for general corporate functions. Such general corporate functions include operational issues such as working capital, repurchase, and distribution of stocks, acquisitions and capital expenditures for the firm. Microsoft is raising money at such a time because the yields that can be obtained from the use of treasury instruments are low and hence the company can issue a much lower rate.

b. Is this paper really cheap? What is YTM for each issue?

The paper is not cheap arising from the fact that the yield from instruments by Treasury is significantly low at the time. Therefore the premium that Microsoft will add to the treasury rate is also considerably low. Investors, as a result, are bound to get significantly less money, yet they face the same levels of risk in the market meaning that the paper is not cheap. It is expensive in the sense that it has a lower rate of return for considerably high levels of risk exposure. The yields for the issues in 2013, 2015, 2020 and 2040 are 0.875$, 1.625%, 3.0% and 4.5% respectively (Luehrman & Lane, 2012).

c. Why YTM differs from coupon rate? What should we compare YTM with?

The yield to maturity differs from the coupon rate based on the fact that these notes are being sold at a discounted price. Ideally, the yield to maturity should be compared with the coupon rate. Vance (2002) indicates that a yield to maturity that is less than the coupon rate means that the market value of the bond is higher than the premium bond or par value of the bond. If the coupon rate is less than its yield to maturity, then it means that the bond is selling at a discount as in the case with the Microsoft notes. If the coupon rate is equal to its yield to maturity, then it means that the notes are being sold at par value.

d. Why did MSFT issue four papers instead of one?

The reason Microsoft issues four papers instead of just one is to spread the risks. The four papers have different risk profiles hence making the issuance of the notes risk diverse. One paper would mean that there would be higher risk exposure if for example, people did not want to buy the type of paper that was available due to limited options. The fact that there are four papers means that there are different options available for investors with different risk appetites. There are options for those who want long term and short term paper and therefore increase the chances of getting purchasers of the notes from any of the four profiles. The issuance of four papers also means that Microsoft perhaps needed some funds for both the long term and short term goals hence needing the money at different times. The issuance of the four papers allows them to

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