How to calculate the redemption yield on a bond?

[trajan]

Reading of Denis O'B's travails has got me interested in bonds, not least in junk bonds.

https://www.irishtimes.com/business...l-assets-of-500m-to-cut-debt-burden-1.3537943

One thing I don't get is this bit:

While Digicel is said to be planning to refinance within the next 12-18 months some $2 billion of bonds that mature in September 2020. However, the value of the notes have fallen to 77.5 cents on the dollar from 100 cents earlier this year, amid a broad sell-off of debt across emerging markets this year and as investors monitor the telecoms group’s own performance.


The bonds move has sent the market interest rate, or yield, on the debt to 21 per cent from 8 per cent.

If the nominal value of these bonds was 100c, then their 'coupon' was 8% and therefore the new current interest rate should be 8/77.5 = 10.3% . . .
Or am I missing something here ?

 

[Brendan Burgess]

Or am I missing something here ?

Yes.

The bond matures in Sept 2020, so you will get 100 cents back for your investment of 77,5 cents now.

Your maths would be correct if it were a perpetual bond i.e. a bond with no redemption.

Brendan

 

[trajan]

Okay.

If the price stays the same till 2020, that makes the annualised yield = 10.3 + 1/2(100 - 77.5)
= 10.3 + 11.25 = 21.55%.
Close enough, Brendan.

 

[Brendan Burgess]

If the price stays the same till 2020,

You are nearly there.

The price between now and maturity does not matter to the calculation of the yield.

You pay 77.5 now and the return is fixed - the coupon + the redemption.

Of course, the market thinks that there is a significant risk that you will not get the redemption. Non payment of the redemption would reduce the yield somewhat.

Brendan

 

[Daddy Ireland]

So can anyone buy into these now and if so how ?

If the market thinks there is a significant risk that one will not get the redemption what theoretically can the yield fall to ?

Is the coupon 100% secure ?

Is ones capital at risk with investing in this ?

 

[trajan]

Okay.
And in the junk bond market, the bondholders do get burned.
Yet despite the lowish price, bondholders seem to be either too greedy or too confident in getting redemption of 100c to let Denny have them . . .
Personally, I see Digicel struggling before 2020 with the declining revenues, increased investment in new services and bondholders to be paid off.
But he's been lucky before more than once.

 

[trajan]

@Daddy Ireland : I suppose you can instruct your man in the NYSE bond market to buy -- but it will be hard to find a seller who hasn't already sold.

I wonder if, under pressure to make redemption calls, Denny might be negotiated into a conversion of j-bonds to stock in Digicel ?
But with the total annual EBITDA only $1 billion and its debt $6.7 billion, does he have sufficient capitalisation value to even make such an offer ?

 

[Daddy Ireland]

Ok thanks Trajan

 

[Andy836]

So can anyone buy into these now and if so how ?

If the market thinks there is a significant risk that one will not get the redemption what theoretically can the yield fall to ?

Is the coupon 100% secure ?

Is ones capital at risk with investing in this ?

No, no coupon is 100% secure.

Yes, ones capital is at risk in almost every single investment, particularly in these bonds which are now priced at ~69.75

 

[Jim2007]

So can anyone buy into these now and if so how ?

If the market thinks there is a significant risk that one will not get the redemption what theoretically can the yield fall to ?

Is the coupon 100% secure ?

Is ones capital at risk with investing in this ?

There is a reason why they are called junk bonds!!!! No one will give you a yield of 21% or even a coupon of 8% for that matter on a risk free investment! Always remember that no matter how it is dressed up, high rates of return means a high risk investment.

Bonds are every bit as risky as equities, it is just that the risk profile is different and people have had it drummed into them that bonds are save.

 

[Sarenco]

Bonds are every bit as risky as equities, it is just that the risk profile is different

I'm not sure I understand what you are getting at here but investment-grade bonds have always been considerably less volatile than equities historically.

 

[EmmDee]

I'm not sure I understand what you are getting at here but investment-grade bonds have always been considerably less volatile than equities historically.

The risk profile is different because in the case of a company running into trouble, bond holders get paid before equity (shareholders). Shareholders are the last. Different classes of bond holders may have different places in the "queue" along with creditors and employees. But the simple rule of thumb is that shareholders only get anything when everyone else does.

But "investment grade" (by which I assume you mean higher rated bonds) are less volatile than the equity market - but bear in mind that investment grade bonds are probably issued by companies that are pretty stable and financially strong with consistent performance - so you may find the equity volatility from those companies are pretty low as well (compared to the general equity market). The main difference is that bonds have a known revenue stream and a known maturity which allows for a smooth profile of value over time (assuming the company goes ok). Equities don't have the same predictable revenue and maturity and therefore the price will move every time a dividend is announced, financial results are published etc etc.

 

[Andy836]

Well, the main reason they're less volatile than stocks, is the fact that they have an anchored value i.e. par or whatever the call premium is, and movements around that point is minimal for the vast majority of bonds. If the price goes too far above par (i.e. the yield decreased) then the company will refinance them subject to hard call T&C's

 

[trajan]

O’Brien may pull off $1.7bn Digicel debt write-off – but at what cost?

Company handed over at least $1.9bn of dividends to O’Brien between 2007 and 2015

www.irishtimes.com

Things might look terminal to most of us.
But most of us don't owe billions to anyone.
When you owe people billions, they - as much as you - have a problem.
And DOB is a cool hand in a tight spot. Digicel revenue is reported to be improving too . . .

 

[Gordon Gekko]

The bond market is huge and it’s a graveyard for private investors looking to dabble. I would run a mile.

 

[trajan]

Digicel retains Citi to advise on possible $2bn Pacific unit sale

Denis O’Brien-owned group confirms it has ‘received approaches’ for business

www.irishtimes.com

Denny's luck airlifts him to safe terrain again. See horoscope attached.
If he makes the $2 bn sale of Pacific, he's in a position to rewire the Caribbean islands for for full media services including business services.
Then Carlos Slim's gonna have to make him an offer he can't refuse . . . .

 

[trajan]

O'Brien set to lose control of Digicel after debt deal

Businessman Denis O'Brien is on course to lose control of Caribbean based mobile phone business, Digicel, following an overnight deal with bondholders to reduce the group's debt pile.

www.rte.ie

Endgame approaches and DO'B shows some realism about the debt.