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Taking Disneys 100-year Sleeping Beauty Bond issue as a motivating example, we aim to analyze whether such century bonds are merely a novelty item or an indicator of a long term trend in investment management.

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Introduction

Introduction 100-year bonds form a niche market, with companies and investors perennially trying to weigh the pros and cons of such very long-term debts. 44 such bonds were issued during the 90s (Exhibit 1), probably as a response to a drop in the yields on Baa corporate bonds to between 7% and 8% from a local high of approximately 10% in 1990. Taking Disney's 100-year "Sleeping Beauty" Bond issue as a motivating example, we aim to analyze whether such century bonds are merely a novelty item or an indicator of a long term trend in investment management. 100-year bonds: Advantages to investors The majority of buyers of such bonds are insurance companies and pension funds. This is because the very-long term income stream that these bonds offer is a good match for investors with very-long term liabilities. The long duration of century bonds helps these institutions to reduce their asset/liability mismatch while their exposure to interest rate risk is offset by the long duration of their liabilities. Also, buying such bonds is a good way for such institutions to immunize their portfolio from interest rate risk, since the long-term stream of income helps them match their long-term cash outflows. ...read more.

Middle

An interesting fact is that century bonds offer tax benefits to their issuers. To illustrate the importance of these benefits, we can take into account the fact that approximately 82% [2] of the companies that have issued such bonds included an option to either redeem or shorten the maturity of the century bonds if there would be any change in tax laws to eliminate the tax deductibility of the interest payments of these bonds. The "Sleeping Beauty" bonds The Disney "Sleeping Beauty" bonds pay 7.55% in annual interest, with the principal to be repaid in the year 2093. Therefore, each $1,000 bond would entitle its owner to $7,555 in interest over its life. From this perspective, it seems that investing in these bonds is a great opportunity for whoever would be willing to bear the risk of such a long-term debt. However, there is a point of great differentiation in the Disney bonds, compared to other long-term debts such as the Coca-Cola bonds - the 1993 Disney bonds have a 30-year call provision, meaning that Disney can buy back the bonds in 2023. The callable nature of the bonds is discussed in the following section. ...read more.

Conclusion

of the previous node by starting with V0 = 100 (since we used the 1 year rate at step 1). Now that we have the interest rate tree, we can value a bond by simply filling in the terminal payoffs and backing out the present values. For the Sleeping Beauty bond, we can make a 100 period tree like this. To add the callable property, we evaluate all nodes at depth 30 and "call" the bonds when V30j > 103.02, and V30j = 103.02. The backed out present value thus obtained will give us the value of the callable bond. Exhibit 4: Cover Sheet Q1 Macaulay Durations yield Sleeping Beauty Napping Beauty 30-yr Coupon 30-yr Zero 7.55% 13.737 7.194 12.257 30 10.00% 10.501 6.919 10.28 30 Q2 Present Values interest rate 30-yr Coupon 30-yr Zero 2% 224.7502316 508.4896249 3% 189.5901117 378.0959175 4% 161.7005739 281.5491479 5% 139.408537 209.9580833 6% 121.4485618 156.7945781 7% 106.8598019 117.2582843 7.55% 100 100 8% 94.90971476 87.8140819 9% 85.03743402 65.85474861 10% 76.81162033 49.45458694 11% 69.89900157 37.18920933 12% 64.04082336 28.00351885 13% 59.03516835 21.11485272 14% 54.72364079 15.94181856 15% 50.9813067 12.05193187 16% 47.70906855 9.123031908 17% 44.82786555 6.914809691 18% 42.27424692 5.247768237 19% 39.99698067 3.987653118 20% 37.95444583 3.033915031 Q3 Q4 Modified Duration Predicted Price Change(%) Actual Price Change(%) Sleeping Beauty 13.23702547 -1.323702547 -1.30647183 Napping Beauty 6.932579389 -0.693257939 -0. ...read more.

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