American Airlines

Case 14: AMR - American Airlines

Valuation: Valuing a Corporate Bond Issue

AMR is the parent company of American Airlines. In addition to its primary subsidiary, AMR also operates several airline support companies such as the SABRE group (reservations), the Management Services Group, and American Eagle (a regional carrier).

American Airlines is currently considering the issuance of a series of $1,000 par bonds. The coupon rate offered, based on current market interest rates and the Standard & Poor's based AMR bond rating, will be 10%. The current interest rate is coincidentally 10% as well. Interest on the bonds will be paid semi-annually. However, American cannot decide on the maturity of the new issue. The life of the bonds will be 10, 20, or 30 years.

PREGUNTAS

1

Ignoring floatation costs, what will the bonds sell for today if American decides to issue the bonds with a maturity of 10 years? What will the price be if the bonds have a maturity of 20 years? 30 years?

Vencimiento de 10 años

Vencimiento de 20 años

Vencimiento de 30 años

Pago semestral

50

Pago semestral

50

Pago semestral

50

Tasa semestral

5%

Tasa semestral

5%

Tasa semestral

5%

N

20

N

40

N

60

Valor a la par

1000

Valor a la par

1000

Valor a la par

1000

Precio Bono

-$1,000.00

Precio Bono

-$1,000.00

Precio Bono

-$1,000.00

2

If the bonds are issued with 10 years to maturity and the day after they are issued, the market interest rates increase to 12%, what will be the price of American Airline's bonds? What if interest rates drop to 8%?

Tasa de interés del 12%

Tasa de interés del 8%

Pago semestral

50

Pago semestral

50

Tasa semestral

6%

Tasa semestral

4%

N

20

N

20

Valor a la par

1000

Valor a la par

1000

Precio Bono

-$885.30

Precio Bono

-$1,135.90

3

If the bonds are issued with 20 years to maturity and the day after they are issued, the market interest rates increase to 12%, what will be the price of American Airline's bonds? What if interest rates drop to 8%?

Tasa de interés del 12%

Tasa de interés del 8%

Pago semestral

50

Pago semestral

50

Tasa semestral

6%

Tasa semestral

4%

N

40

N

40

Valor a la par

1000

Valor a la par

1000

Precio Bono

-$849.54

Precio Bono

-$1,197.93

4

If the bonds are issued with 30 years to maturity and the day after they are issued, the market interest rates increase to 12%, what will be the price of American Airline's bonds? What if interest rates drop to 8%?

Tasa de interés del 12%

Tasa de interés del 8%

Pago semestral

50

Pago semestral

50

Tasa semestral

6%

Tasa semestral

4%

N

60

N

60

Valor a la par

1000

Valor a la par

1000

Precio Bono

-$838.39

Precio Bono

-$1,226.23

5

Based on your answers to questions 2 through 4, what is the relationship between time to maturity and the price of the bond?

A medida que se incrementa los años de vencimiento del bono, también aumenta el precio del bono, ya que se incrementa el riesgo en el valor de la tasa de interés

6

Based on your answer to question 1, what is the relationship between current interest rates, the coupon rate, and time to maturity?

En este caso, estos factores no afectan el precio del bono ya que la tasa de interés del mercado es la misma que la del cupón del bono