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a. In Feb'2018, Amazon raised US$3.5 bn by issuing 10-year bonds carrying annual coupon of 3.15%. Amazon could also have raised the same amount of funds from the equity market. What benefits does Amazon get by raising funds via bonds that they would not have received by issuing equity? Why do you think the company did not take a bank loan for the total amount raised?
Part b In Feb'2018, Amazon raised US$3.5bn by issuing 10-year bonds carrying annual coupon of 3.15%. The face value of the bond is $1000 and the coupon is paid every six months.
i. If the bond yield at the time of issue was 3.5%, what would be the price of the bond at the time of issue?
ii. If the bond yield at the time of issue was 3.0%, what would be the price of the bond at the time of issue?
iii. It is said that the price of a bond is inversely proportional to the prevailing interest rates. Prove this statement by taking the case of the above bond and computing the price of the bond at the above two yields (3.0%, and 3.5%) for different times from maturity. You may compute the bond prices at 5 years, 2 years, 1 year, and at maturity.
iv. What would be the price of the bond immediately before the payment of the final coupon (compute for both bond yields)?
v. What would be the price of the bond immediately after the payment of the final coupon (compute for both bond yields)?