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Walt Disney Companys Sleeping Beauty Bonds- Duration Analysis

Question 1:
Cash payments associated with sleeping beauties bond includes 100 as cash outflow and 7.55%
as cash inflow each year. At maturity, they get interest and principle amount which is
100+7.55%= 107.55. Those who invested in sleeping beauty bond will get 7.55% each year or
3.775 % semiannually. At maturity they will get principal amount as well which becomes
107.5%.
Question 2:
According to basic spread sheet they used the 10% interest rate to derive the price of bond. 10%
interest rate is higher than 7.55% which is used to calculate net present value. We examined that
higher interest rate give us low net present value as compare to 7.55% interest rate.
Question 3:
In this question the prevailing interest rate increased by 1% from 7.55% to 8.55%. First, we
calculate the price of bond at 7.55% which give us cash flow of $100. At 8.55% interest rate the
present value is $88.31 which shows that when the interest rate rises, the present value would
decrease from par value. And when interest rate dropped by 1%, from 7.55% to 6.55%. The
present value of sleeping beauty bonds becomes 115.24 which are greater than par value. (See
basic spreadsheet #3, 4).
Question 4:
We use the present value formula to calculate cash flow received in n years are given as follows,
PV = FCF/ (1+i) ^n
You can also see (excel basic spreadsheet #3, 4).
Question 5:
According to graph we see that raw cash flow is same in whole year. Raw cash flow is constant
with 7.55%, there is no fluctuation thats why blue line represent constant inflow. On other side
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if we look at present value of cash flow in graph. So we clearly get cues in starting years we have
greater value of cash flow because curve trend on upward in starting years. After year 2000, the
curve trend slightly moves to downward so remaining year they show trend remains a constant.
(See excel sheet Q#5).
Question 6:
We calculate NPV of sleeping beauties for each interest rate that are given in Column D. (see
excel sheet Q#6).
Question 7:
A) According to excel sheet maturity, the prices of sleeping and napping beauty bonds are
$100 at the interest rate of 7.55%. As discount rate and coupon rates are same the price of both
bonds would be equal.
B) As time passes, if interest remain around 7.55% than the expected price of bond will be
around $100. With the change in maturity the interest rate gets affected but here interest rate is
same so expected return is also same.
C) If interest rate fluctuates and again stabilizes around 7.55 than two effects are occurring. One
is when interest rate increase to 7.55% in market than prices would decrease of bond. On the
other hand if interest rate is decrease by 7.55% than its prices automatically increase in the
market. Changing occurs in both sleeping and napping beauty bond is quite different. Change
occurs in sleeping beauty bond is greater than napping beauty bonds because sleeping beauty
bonds have long term maturity as compare to napping beauty bonds. The cash flows of first two
years would change.
Question 8:
We create the picture of present value pattern of 10 years bond. In this question 10 year bond is
napping beauty so we create a picture of napping beauty where interest rate is increased from 7
to 7.55%, in this way there is slight upward movement in curve trend at 100$. In other picture
where interest rate is moving from 7% to 8%, there is a constant curve trend. You can also see
clear picture in (excel sheet Maturity Q#8).
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Question 9:
A) While comparing the interest rates greater than 7.55% (8% to 20%) of both the bonds, we
found that napping bonds are better than sleeping bonds. As the interest rate increases, present
value of sleeping bonds decreases rapidly than napping bonds. E.g. when interest rate changes
from 8% to 9%, present value of sleeping bonds decreases by $10.49 whereas present value of
napping bonds decreases by $6.29. (See excel sheet maturity Q #8).
B) While comparing the interest rates less than 7.55% (2% to 7%) of both the bonds, we found
that napping bonds are better than sleeping bonds. As the interest rate increases, present value of
sleeping bonds decreases rapidly than napping bonds due to its maturity effect. E.g. when interest
rate changes from 6% to 7%, present value of sleeping bonds decreases by $17.91 whereas
present value of napping bonds decreases by $7.55. This shows that sleeping bonds are more
sensitive while to interest rate fluctuations. (See excel sheet maturity Q #8).
C) According to the graph values of the sleeping and napping bonds we see that 100 years bonds
that is sleeping beauty bond fluctuate and decrease more rapidly than 10 year bonds which is
napping beauty bonds. 10 year bonds trend is higher than 100 year bond as well as drastically
there are smaller fluctuation in these napping beauty bond. (See excel sheet chart).
Question 10:
A) 100 would be the price of 30 year zero-coupon bond per $100 repaid in 2023 face value (see
Excel sheet 30 years bond Q#10).
B) 30 year zero-coupon bond does not make coupon payments. Instead, it is rewarded with an
increase in the value of bond over the time. And the face value repaid at the time of maturity
which is $100. When years to maturity decrease, the price of zero-coupon bond relatively
increased over the time.
Question 11:
A): For each bond we compute the midpoint of the present value pattern that also show on (excel
sheet Q#11). Mid point for each point is different according to their present value pattern.
present value of 30 years sleeping beauty bond is 2002-03, present value of zero coupon 30 year
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bonds is 2023, present value of 10 years bond 2002-03 and present value of 100 year bond is
2002-03.
B): Sleeping beauty 100 year bond average year is 2043.5, we also clearly see that in (excel
sheet Q#11) in start there a rising trend and gradually trend change but at the year 2043.5
consistently trend show in graph. After decreasing its value consistent trends shows after 2043.
Look at 10 year napping beauty bond where average year is 1998.5, according to our graph in
(excel sheet Q#11) they show that bonds cash flow trends in starting year declined and somewhat
raised. So on the point 1998.5 curve trend show consistency and finally at the nearest maturity
trend increased.
On other side we look at 30 year sleeping beauty bonds on (excel sheet Q#11) there clearly trend
that show average year is 2008.5. In starting year prices rise and gradually trend decrease, but
after 2008.5 they show consistency in trend. In bond nearest to maturity there trend raised
rapidly.
In zero coupon 30 year bond average year is 2008.5 that you look at (excel sheet Q#11).there is
no coupon payment so throughout the duration curve trend constant at o level and last year when
bond is going to mature than trend automatic rise because they received all amount collectively
at the time of maturity.
Question 12:
Duration of 4 bonds is as follows:
Sleeping beauty (100 year) =14.24
Napping beauty (10 year) =7.37
30 year bond =12.64
Zero coupon bond (30 year) =30.00
We are not surprised that the Sleeping Beauties have a shorter duration than the 30-year zero
coupon. Because we know that bonds with high coupon rates (Sleeping beauties, 10-year bonds
and 30 year Bonds) and high yields will tend to have lower durations than bonds that pay low
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coupon rates or offer low yields. This makes empirical sense, because when a bond pays a higher
coupon rate or has a high yield, than definitely it shows lower duration.
Question 13:
b. The longer the maturity of the bond, the more sensitive the bond will be to changes in interest
rates. In coupon bonds, 100 year sleeping beauties 11.7% is more sensitive to an interest rate
change as compare to 30 year (10.7%) and 10 year (6.6%) coupon bonds.
Question 14:
When interest rate falls from 6.55% then drastic percentage change occurs in value of four bonds
that can be seen in excel sheet (sensitivity down Q#14).
Question 15:
According to excel sheet relation, we found that percentage change in interest rate up and
down are almost closer to the duration of bond. E.g. in 100 year sleeping beauty bond the
percentage change is15.24% when interest rate decreased by 1 percent, this shows closeness to
duration (14.24). This shows the accuracy of our calculations, so mangers can hedge the interest
rate risk because our bond duration matched with percentage change in values.

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