A Call to Guernsey

a case study by Ian H. Giddy

You are the assistant manager of the international bond syndicate desk of Crédit Suisse in Zurich. The manager of a Trust in the Channel Islands telephones you. He is interested in investing in a US dollar denominated Eurobond, and wants to get a good yield. You tell him about some new issues that are available, but note that some of them are callable. He says that's okay, as long as he's getting good value for his money. He asks you to fax him a list of bonds currently available.

An hour later he calls you. He has studied the fax and identified three bonds that are satisfactory credits for his Trust and seem to offer decent yields. But he would like your advice in deciding which of the three offers the best value for money.

The three bonds are:

A 4-year Sony Eurodollar bond paying 9.1%, callable at 102 in two years.
A 4-year BASF Eurodollar bond paying 9.3%, callable at 101 in three years.
A 4-year SNCF noncallable Eurodollar bond, paying 8.7%.

All the bonds are priced at par. Please explain the method you would use to compare the value of the three bonds from the investor's point of view. To help you some information about conditions in the bond market and in the Treasury bond options market is given below.

March 24, 1996

U.S. TREASURY YIELD CURVE

AA CORPORATE YIELDS

VOLATILITY OF TREASURY YIELDS

3 MONTHS

1 YEAR

2 YEARS

3 YEARS

4 YEARS

5 YEARS

10 YEARS

30 YEARS

5.97

6.28

7.09

7.32

7.55

7.76

8.07

8.26

6.30

7.40

7.67

8.04

8.44

8.72

9.5%

9.6%

10%

11.2%

9.9%

9.7%

Ian H. Giddy, Professor of Finance
New York University • Stern School of Business
44 West 4th Street, New York 10012
Tel 212 998-0332 • Fax 212 995-4233

Go to Giddy's Web Portal • Contact Ian Giddy at ian.giddy@nyu.edu