Breach of Contract

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

      Calculate price
                           Your bond                Periods      Pymts          PV
    (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
                             Your bond
       (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?
      (3) Did LBO make representations of "investment grade" false and misleading?
      (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

				
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