Analyzing Bond Issue: Bank of America
About the company
Founded in the year 1904 by Amadeo Peter Giannini and headquartered in Charlotte, North Carolina, Bank of America, is an American multinational banking company that provides financial services to retail as well as institutional customers. The company is one of the largest companies in the United States and operates through five business segments, namely, Consumer Banking, Global Wealth & Investment Management, Global Banking, Global Markets, and Legacy Assets & Servicing. The company through its subsidiaries also provides asset management and risk management services. The company operates in more than 40 countries and serves 56 million customers in the United States alone. By the end of 2015, the company had employed 213,000 individuals and presently have market capitalization of $150.15 billion.
The bond issue
On June 2nd, 2009, Bank of America issued a bond series accumulating $2500 million. The bond term was set at 10 years with maturity period at June 1st, 2019. The bond carried a coupon rate of 7.625% and was priced at $99.24. The bonds were issued in the mutiple of $5000 or excess of that.
Current scenario
As of Feb. 29, 2016, the price of the bond was $115.806.
Learning from the issue-Both from text learnings and outside text learnings
Analyzing the bond pricing, we practically witnessed the concept of discount and premium in bonds. Important to note, at the time of the bond issue, the bond was priced below par at the value of $99.86. This confirms that the yield to maturity (YTM) of the bond must have been higher than the coupon rate of 7.625% because bonds with yield to maturity(YTM) higher than the coupon rates, are traded at discount price. In order to validate our findings, we calculated the YTM using the ‘RATE’ function in excel and found the value to 7.742%. This confirmed our findings related to the bond being issued at discount to the par value.
Using the RATE function in excel for calculating Yield to Maturity was the one aspect that was not taught in the class,but we found this really useful and would like this to be incorporated in future classes
Next, as we stated previously, as of Feb. 29, 2016, the price of the bond was $115.806, i.e. premium to the par value. At the same time, the YTM of the bond was 2.52%, while the coupon rate was fixed at 7.625%. In other words, since the Coupon Rate of the bond was now higher than the YTM rate, the bond was being traded at the premium value.
Henceforth, this real world scenario helped us in learning more about the bonds being traded at discount and premium.
Issues with bond data access
Since we were accessing the real world bond data for the first time, it took some time for the group to find the best resource and the one that was perfectly organized to assist beginners like us. After meticulous observation,we selected Yahoo Finance Bond Screener that was powered by Morningstar database only. This data resource was highly useful in tracing the bond history and the current valuations.
Time Spent
Since it was a group project, it was easy for us to proceed with the project and complete it within four hours.
References
Profile: Bank of America. n.d. 1 May 2016 <https://in.finance.yahoo.com/q/pr?s=BAC>.
