Free Essay About Bonds Valuation And The Structure Of Interest Rates

On 29th April 2014, the Wall Street Journal published an article titled “Apple Returns to Bond Market”. The article talks about Apple’s success in the completion of its second bond sale. There was a very high investor demand for the Apple bonds. The high demand translated the corporate debt into larger gains compared to the US stocks. Apple is said to have sold $12 billion worth of debts that had diverse maturities at interest rates that were less compared to the interest rates set by the US Treasury on its debt (Cherney, 2014). The difference in interest rates was less than 1%. The result was an increase in the people’s faith on Apple. Large numbers of investors placed orders that were valued above $40 billion.
Apple was able to sell its debt after increasing its share buyback and its dividend. These actions were made so as to provide incentives to the shareholders. Apple was able to sell $17 billion worth of debt. According to the market value, Apple was termed as the top valuable firm in the US. The Apple bonds were seen as more attractive compared to the treasury bonds. It also offered a good alternative for the treasury bonds (Cherney, 2014).
The changes in interest, dividend payments, and prices affect the total returns received from bonds. The return from corporate debt is 1.01% above that of the Treasury (Cherney, 2014). There is a high expectation that the returns from bonds of companies that are in the investment grade are bound to rise. Such gains show that large companies in the US will continue to benefit from the economic expansion of the country and the low interest rates that have been set. The Federal Reserve is responsible for the success made by these companies due to its policy of easy-money. Apple sold bonds that had fixed rates as well as bonds that had floating rates.
The above article relates to the chapter on “Bonds Valuation and the Structure of Interest Rates” because it talks about the valuation of bonds and also refers to different structuring of interest rates depending on the maturity of the bonds. Bond valuation is done in a way that attracts investors. Apple has been able to attract many investors due to its rate of return. The return on the debt of the US Treasury is lower compared to that of Apple and this attracts more investors to Apple. Apple is also attractive because of the brand equity it possesses. Many people love the products of Apple and it seems the company is not about to start failing.
Bonds that have similar maturities may have different interest rates because of various factors such as risk of default, tax considerations, and liquidity. The risk of default may occur if the company issuing the bonds is not able to pay off interests or return the shares at face value. In this case Treasury bonds are preferred because the government can always increase taxes so as to enable it to pay its shareholders. The structure of the interest rates is also dependent on the liquidity feature of an asset. If an asset is more liquid it means it easy to convert it into cash. Tax considerations affect the structure of interest rates because shareholders do not want to incur a lot of costs on the returns they accrue from their investments. In this case, municipal bonds are preferred because they are exempted from income tax.
The above article shows that bonds from Apple are very attractive to investors compared to the bonds from US Treasury. However, some of the factors that affect the structure of the interest rates make the bonds of the US Treasury more favorable. The shareholders are more interested in the returns they make from their investments.

Works Cited

Cherney Mike. Apple Returns to Bond Market: Maker of iPhone Sells $12 Billion in Debt. 29 Apr. 2014. Web. 8 Apr. 2015. http://www.wsj.com/articles/SB10001424052702304393704579531591100806848