Citigroup (C 6.625 32)
Report by: Chris Castellano and Frank Lavrigata
Date of Analysis (data collected): Thursday, September 18, 2008
Date of Report: Saturday, October 18, 2008
I: Citigroup (C)
The bond issued by Citigroup has a 6.625% coupon rate. The bond has a maturity date of June
15, 2032. The purpose of this bond issue is for Citigroup to raise proceeds that are used for
general corporate purposes.
The bond was issued on May 30, 2002 with a par value of $1,000. The bond quote is 111.48.
The price per bond is $1,114.80. The dollar amount issued is $1,000,000,000. The current
market value is $1,114,800,000. The current yield of the bond is 5.943%. The bond is not
callable under current conditions. The bond does not have a sinking fund.
A: Estimates and Assumptions
Current yield (CY): The current yield displays as a percentage, the annual cash flow of the bond
($66.25 or 6.625%) relative to the price paid for the bond ($1,114.80 or 111.48%). The current
yield of the bond is 5.934%.
Dollar Price (P): The quote is a percentage of the par value. The dollar price of the bond is
$1,114.80 which is determined by the quote of 111.48% and the $1000 par value. The trade
date is September 18, 2008 and the settlement date is three business days later on September 23,
2008. This information is from the bond’s quote page on yahoo.
Coupon Payment: The coupon rate of 6.625% is the percentage of the par value ($1,000) that
once calculated results in the dollar amount of the annual coupon. 6.625% of $1,000 results in a
$66.25 annual coupon. The semiannual coupon, which is half of the annual coupon, is $33.125.
Accrued Interest: Accrued interest is calculated by first determining the number of days in the
accrued period. The accrued period is June 15, 2008 to September 22, 2008 and accounts for 16
days in June, 30 days in July, 30 days in August, and 22 days in September which is a total of 98
days in the accrued period. There are 180 days in the 6 month coupon period which is June 15 to
December 14. The amount of days in the accrued period of 98 compared to the 180 days of the
coupon period gives the percentage of the per period coupon payment, $33.125, that is paid in
addition to the price of the bond. The result is $18.035 in accrued interest.
Investment (outflow): The investment or the initial cash outflow is the invoice price. This
number is determined by combining the dollar price of the bond and the accrued interest. The
dollar price of the bond of $1,114.80 and $18.035 in accrued interest total an invoice price of
$1,132.835. This is the amount that must be paid to receive the bond.
Cash Inflows: The intermediate cash flows are equal to coupon payments of $33.125 and are
received on June 15 and December 15 of each year. Once the coupon matures on June 15, 2032,
the coupon of $33.125 and the par value of $1000 are both received totaling $1033.125.
Required return (r): The required return is determined by comparing the bond to composite
bond rates with the same risk class and maturity. The maturity of the bond is 24 years and the
risk class is AA. The bond can be compared to the composite bond rate for a 20 year AA bond,
5.77%, after an adjustment for maturity is made to account for the extra four years. The
adjustment is made by first determining the yearly required return by calculating the spread
between a 20 year AA bond and a 10 year AA bond. The yearly required return is determined
from the result. The yearly return is then adjusted to display a four year return. After combining
the adjustment with the 20 year AA bond rate of 5.77%, the resulting required return is 5.398%.
A risk class adjustment was not necessary for this bond analysis because the rating of the bond is
AA and the AA composite rate of 5.77% is used to determine the required return of 5.389%.
Valuation: The inputs to determine the dollar value consists of the amount and timing of the
cash flows (CF) and the required return (r). The cash inflows are the $33.125 semiannual
coupon payments that are received on June 15 and December 15 each year until the bond
matures June 15, 2032. The $1000 par value is received with the last coupon payment on June
15, 2032. The required return is 5.3980%. Determining the yield to maturity also requires the
initial cash outflow, the invoice price of $1,132.835.
After performing a bond analysis, the dollar value of the bond is $1,164. The dollar
value is obtained by calculating the present value of the cash inflows. When using the required
return to determine the dollar value it is important to adjust this number by the yearly frequency
of coupons. The bond is acceptable because the dollar value of the bond ($1,164) is greater than
the invoice price ($1,132.835). The bond’s value is greater than the price.
The yield to maturity is the expected return on the bond if the bond is held to maturity. It
is determined by setting the present value of cash flows equal to the initial cash outflow (the
invoice price of $1132.835) for the bond and solving for the discount factor. Since the bond is
semiannual, a semiannual internal rate of return is first determined to be 2.805%. The SA IRR is
half of the YTM of the bond which is 5.611%. The yield to maturity (5.611%) is greater than the
required return (5.398%), so the bond is acceptable. An investor is more than compensated for
the risk of the bond as determined by the required return, and can expect abnormal returns.
Recommendation: The dollar value of the bond, $1,164, is greater than the dollar price,
$1,114.80, and the expected return, the yield to maturity, 5.611%, is greater than the required
return, 5.398%, therefore making the bond a ‘buy’. This bond, however, should not be classified
as a strong buy because there are more suitable options. The 20 year AAA composite corporate
bond yield (5.82%) is greater than the expected return for the Citigroup 24 year AA bond
(5.611%). An investor can earn a better return on a bond with lower risk and a shorter maturity
by buying a 20 year AAA bond. This is not a normal situation and is due to the current crisis.
Company: Citigroup (C)
Date of Data: Thursday, September 18, 2008
CITIGROUP INC As of 18-Sep-2008
Coupon (%): 6.625
Maturity Date: 15-Jun-2032
Yield to Maturity (%): 5.749
Current Yield (%): 5.943
Fitch Ratings: AA
Coupon Payment Frequency: Semi-Annual
First Coupon Date: 15-Dec-2002
Quantity Available: 50
Minimum Trade Qty: 5
Dated Date: 6-Jun-2002
Settlement Date: 13-Sep-2007
Citigroup Inc. 6.625% subord notes, due 2032:
AUTHORIZED -- $1,000,000,000.
DATED -- May 30, 2002.
DUE -- June 15, 2032.
INTEREST -- J&D 15 to holders of record on J&D 1 at 6.625% per annum accruing from June
TRUSTEE -- Bank One Trust Company, N.A.
DENOMINATION -- Fully registered, $1,000 or multiples thereof.
CALLABLE -- Not callable prior to maturity, except at any time upon the occurrence of a tax
event, in which case the redemption price will be equal to 100% plus accrued and unpaid interest
to the date of redemption.
SINKING FUND -- None.
SECURITY -- Unsecured. Subordinated in right of payment to all senior indebtedness of Co.
INDENTURE MODIFICATION -- Indenture may be modified, except as provided, with the
consent of at least 66 2/3% of notes outstg.
RIGHTS ON DEFAULT -- Trustee or 25% of notes outstg may declare principal due and
payable 930 days grace for the payment of interest).
PURPOSE -- Proceeds will be used for general corporate purposes.
OFFERED -- ($1,000,000,000) at 98.651 plus accrued interest (proceeds to Co. 97.776)
Maturity Yield Yesterday Last Week Last Month
2yr AA 4.31 4.21 4.05 4.06
2yr A 7.47 8.06 6.12 4.92
5yr AAA 5.32 5.01 4.68 4.81
5yr AA 5.74 6.36 5.49 5.38
5yr A 5.66 5.49 5.58 5.64
10yr AAA 5.11 4.88 4.73 4.85
10yr AA 6.70 6.63 6.06 5.86
10yr A 6.40 6.30 6.31 6.18
20yr AAA 5.82 5.69 5.65 6.02
20yr AA 5.77 5.64 5.73 5.82
20yr A 6.40 6.08 6.08 6.28
Bond Analysis Chris Castellano
Fall 2008 Frank Lavrigata
Step 1 Name Citigroup [C]
Maturity Date 15-Jun-32
Trade Date 18-Sep-08 as of
Settlement Date 23-Sep-08 Trade Date + 3
Coupon Dates 15-Jun-08
Step 2 Current Yield = coupon/quote 5.943%
Step 3 Dollar Price = quote * par $1,114.80
Per period dollar coupon =
Step 4 coupon*par/frequency $33.125
Step 5 Accrued Interest
Coupon Period 15-Jun-08 14-Dec-08 180 days
Accrued Period 15-Jun-08 22-Sep-08
Accrued interest = per period dollar coupon * days in accrued period/days in coupon period
Step 6 Invoice price = dollar price + accrued interest $1,132.835
Step 7 Cash Flows
Maturity 24 Rating AA
Step 8 Required Return
5 Year AAA 5.32%
5 Year AA 5.74% 0.42%
5 Year A 5.66% -0.08%
10 Year AAA 5.11%
10 Year AA 6.70% 1.59%
10 Year A 6.40% -0.30%
20 Year AAA 5.82%
20 Year AA 5.77% -0.05%
20 Year A 6.40% 0.63%
20 Year AA 5.77%
Adjust for maturity = 20 year AA bond + ((20 year AA bond - 10 year AA bond)/10)*4
24 year AA 5.3980%
adjust for one risk class = 25=4 year A + one risk class
Not Needed Not Needed
Step 9 $V $1,164.00
Step 10 SA IRR 2.805%