# Breach of Contract

Document Sample

```					Valuation of bonds
What is a bond? What affects its price?

Calculate price
(semiannual pymts)
Par                      \$1,000.00                   1          \$32         \$31.33
Coupon rate               6.40%                      2          \$32         \$30.67
Time to maturity (yrs)       10                      3          \$32         \$30.02
Current yield             4.30%                      4          \$32         \$29.39
Price                    \$1,169.23                   5          \$32         \$28.77
6          \$32         \$28.17
7          \$32         \$27.57
8          \$32         \$26.99
9          \$32         \$26.42
10          \$32         \$25.87
11          \$32         \$25.32
12          \$32         \$24.79
13          \$32         \$24.27
14          \$32         \$23.76
15          \$32         \$23.26
Questions                                           16          \$32         \$22.77
(1) What happens if yield > coupon?                 17          \$32         \$22.29
(2) What happens if yield < coupon?                 18          \$32         \$21.82
(3) What if the same?                               19          \$32         \$21.36
(4) What if longer-term?                            20         \$1,032      \$674.39
(5) What if shorter-term?                                       Total     \$1,169.23

Calculate price
Q(1)           Q(2)      Q(3)        Q(4)        Q(5)
(semiannual pymts)
Par                      \$1,000.00    \$1,000.00   \$1,000.00   \$1,000.00   \$1,000.00
Coupon rate                6.40%       6.40%       7.10%       6.40%       6.40%
Time to maturity (yrs)       10           10          10          15          5
Current yield              8.20%       4.30%       7.10%       4.30%       4.30%
Price                     \$878.76     \$1,169.23   \$1,000.00   \$1,230.38   \$1,093.58
Calculating yield
If you know price, what is bond paying (effective interest rate)?

Calculate yield
(semiannual pymts)
Par                    \$1,000.00
Coupon rate              8.60%
Time to maturity (yrs)     10
Current yield            9.46%
Price                   \$945.00
Met Life & Jefferson Pilot v. RJR-Nabisco
What is an LBO?
(1) How does acquiror get enough cash to pay shareholders 50% premium?
(2) How does acquiror repay its loans? And still make money for itself and investors?
(3) How did KKR's leveraged buyout of RJR-Nabisco affect existing bondholders?

Met Life's RJR bonds        Pre LBO        Post LBO      Post LBO                       Bond
(in \$ millions)          (July '88)     (Jan '89)     (Jan '89)                    discount
Face amount           \$ 340.5              \$ 340.5 \$ 340.5                            \$ 1,000.0
Coupon rate             9.43%                9.43%    9.43%                            10.25%
Time to maturity (yrs)     5                    5       10                                10
Current yield           9.22%               13.50%   13.50%                            13.00%
Price                  \$343.31             \$291.26 \$265.64                            \$848.50
Gain (loss)                                \$ (52.0) \$ (77.7)                          \$ (151.5)

RJR Nabisco - Capital Structure
In Millions

1987        1988         1989       1990

Debt                                     \$4,326   \$21,085       \$17,352     \$13,831
Convertible Debt & Pfd. Stock                      \$3,892        \$4,746      \$5,146
Total Debt                               \$4,326   \$24,977       \$22,098     \$18,977

Equity                                   \$6,038    \$1,219        \$1,219      \$1,452

Total Capital                       \$10,364       \$26,196       \$23,317     \$20,429

What was Met Life's argument against LBO?
(1) Did LBO breach contract? frustrate contract?
(2) Was LBO violation of implied covenant of good faith / fair dealing?
(4) What is purpose of "the corporation"?
What might Met Life have done to protect itself?
(1) What is a poison put? (how priced - see below)
(2) What are restrictive covenants? What activities covered?
Value of Poison Put on MetLife 10.25% Coupon Bond
Original Price of Bond                                          1065
Exercise/Strike Price (Principal on Bond)                       1000
e                                                            2.7183
Risk-free rate, continuously compounded                        0.035
Standard Deviation                                                0.3
Variance (St Dev)^2                                            0.09
Time to expiration                                              3560 days
t                                                         9.75342

d1                                                               0.9000
N(d1)                                                          0.8159
d2                                                              -0.0369
N(d2)                                                          0.4853
C0                                \$ 524.04

Value of Put (P0) Using BSOPM                 \$ 169.84

```
DOCUMENT INFO
Shared By:
Categories:
Stats:
 views: 34 posted: 11/14/2010 language: English pages: 3
Description: Breach of Contract document sample