Lyons Case

In: Business and Management

Submitted By bingbing
Words 4998
Pages 20
The Lyons Document Storage Corporation was a family business established in 1993. It faced up to a recession due to the growth of its competitors in 1990s. Thus, the company started to issue bonds on July 2nd 1999 to fund its growth. However, currently, in year 2008, the company is considering issuing a new bond to replace the old bond and the purpose of this case is to analyze both the old and new bonds as well as their impacts to the company. Also, the choice would be made between those two bonds under a certain market interest rate.
Part I: Analysis of the old bond
Currently, Lyons Document Storage Corporation is suffering a long term debt which includes the bond being issued on July 2, 1999 and would be due on July 2, 2019. Interest is payable semiannually on January 2 and July 2 but the company only received 9.1M in cash with regard to the bond face value of 10million. When a bond is issued, the difference between the amount of money the borrower actually received and the face value of the bond is called either the “premium” or “discount”. Premium bonds are the bonds sold at a price higher than the bonds face value while the discounted bounds are referring to the amount received less than the face amount. The bond would be sold at a premium if the current market rate of interest is less than the coupon offered. If the yield rate is greater than the bond rate, a discounted bond would be issued.
Thus, the discount of the bond for the company would be 10M-9.1M=0.9M. Also, the amount company should have received was calculated by
V40=ZP/F,i, n+rZP/A, i, n=10M (P/F, 9%/2, 40) + (8%/2)*10M (P/A, 9%/2, 40) with nominal bond rate of 8%, yield rate 9% and payable period=2*20years=40periods. After calculation, the amount the company received should be 9.079M. The company is considering the feasibility of issuing a new bond which makes it important to…...

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