1. Speculate why Disney management chose to issue unusually long-term bonds? (e.g.

,
What predictions was management making about future interest rates?)
Companies issue bonds with long maturities because the goal of any business is to profit from
the market's demand. Certain institutional investors use long term bonds to lengthen the
duration of their bond portfolios to fulfill certain duration-based goals. The demand for this type
of long-term bond as an indicator of consumer sentiment for a specific company.
Such a bond is a chance to lock into the very low interest rates seen in the credit market for a
long time.
2.

Why did the Disney bonds have a higher yield than 30-year U.S. Treasury bonds?

Disney Bond has higher yield than 30-year US Treasury bonds because:
Payment period for 100 years, has more liquidity risk
Higher credit risk compared with US Treasury bonds
Disneys bond incorporates a call option.
Thus, investors require larger yield of this bond.
3. From the perspective of the bondholder, which was more valuable, the $300 million
principal (or face value) of the bonds or the semi-annual coupon payments? [Hint: Calculate the
present value of a) the face value and b) the coupon payment stream.]
From the perspective of the bondholder, semi-annual coupon payments are more valuable than
the final payment of face value in terms of present value.
For coupon yield = 7.55% as YTM, the present value for face value is $207,052.17
Present value for coupon payment is $149,999,785.65.

4. The Pricing Supplement to the Prospectus discusses Disneys option to call or redeem
the bonds beginning July 15, 2023 at 103.02% of their face value declining to 100% of face
value after July 15, 2043.
a. From the perspective of the bondholder, what effect does the Companys call option have
on the attractiveness of the Bonds at the issuance date?
From the investors perspective, the Companys call option will make the bond less attractive at
issuance date, because investors will bear the interest risk when the interest declines in 30
years.

b. From the perspective of the Disney Company, why would management include a call
option in the terms of the bond?
Management of the Disney Company included a call option because it provided the chance to
buy back the bonds and issue new bonds at lower costs. Obviously this is beneficial to the
company.
c. On the next day, Coca-Cola issued $150 million of 100-year non-callable bonds.
Speculate as to how the yield differed between the Disney and Coca-Cola issues.
Coca-Cola s bonds have a higher yield than Disneys callable bonds, because non-callable
bond protect the interest of the investors versus the company.
5. From the perspective of the bondholder, calculate the market value of the bonds one
year after the date of issuance if:
a. Long term yields for similar risk securities increased by 1%.
b. Long term yields for similar risk securities decreased by 1%.
c. Interest rates had not changed but the expected life of the Company dropped from 100
years to 50 years (with 49 remaining).
d. Discuss the potential impact of inflation on bondholders.

FV

Interest rate

No. of years

PV

300,000,000

0.038

198

$298,027,540.97

300,000,000

0.028

198

$404,023,394.81

300,000,000

0.033

98

$341,389,275.87

Inflation will negatively impact the benefit of bondholders. Inflation will increase the interest
rates. The bondholders may earn higher yields if they invest on alternative investments.
6. From the perspective of the Disney Company, use a spreadsheet to prepare bond
amortization tables based on the following independent sets of assumptions:2
a. Bonds issued at par (face value) with semi-annual coupon payments.
b. Bonds issued at a discount (i.e., less than face value) with semi-annual coupon
payments, where the coupon rate of 7.55% was less than the market yield of 9%.
c. Bonds issued at a premium (i.e., greater than face value) with semi-annual coupon
payments, where the coupon rate of 7.55% was greater than the market yield of 6%.

7. From the perspective of the Disney Company, prepare a journal entry to:
a. Record the issuance of the bonds on July 29, 1993. (Hint: look at the cover page of the
Pricing Supplement to the Prospectus.)
dr. cash
Cr. Bonds payable

8. As senior manager at Disney in 1993, would you have supported the issuance of 100-year
bonds given the then-current economic environment?
As a senior manager at Disney Company in 1993, I will issue long-term bonds in the then
current circumstance. The market interest rates were low all around the world and the economy
will finally recover, bringing interest rate to a normal level. Thus, the expected long-term interest
rates will rise. Under this circumstance, the company will lock this good opportunity of low cost
of fund by issuing long-term debts.
Disney also has a very strong brand and a sentimental value attached to the brand. It is their
strongest factor of production. Those who invest in this long term bond, will actually be those
who truly believe in the Disney company. Its a good strategy to leverage the brand loyalty of
long term investors (disney philes).