《金融工程》案例解析(英文版)

1、FinancialEngineering返回目录返回目录1Cases in Financial EngineeringInstructor: Chen MiaoxinFinancialEngineering返回目录返回目录2The Case of RJR Nabisco Holding Capital CorporationFinancialEngineering返回目录返回目录3Reference:Robert M. Dammon, Kenneth B. Dunn. And Chester S. Pratt. 1993. The Relative Pricing of High-Yield

2、Debt: The Case of RJR Nabisco Holdings Capital Corporation. the American Economic Review, 83 ( Dec.) FinancialEngineering返回目录返回目录4Part One: BackgroundFinancialEngineering返回目录返回目录5Background 1w The firm known in 1991 as RJR Nabisco was a descendant of the tobacco firm R.J. Reynolds, founded in 1875.w

3、 Through acquisitions in the 1960s, the tobacco firm entered a variety of food businesses.w After its 1985 merger, the firm was renamed RJR Nabisco. FinancialEngineering返回目录返回目录6Background 2w In the late 1980s the food products industry experienced massive consolidation through mergers.w In 1988 two

4、 main bidders proposed to take the RJR Nabisco private in a leveraged buyout contest:The Management Group Kohlberg, Kravis, Roberts &Co. (KKR), a firm specializing in leveraged buyoutsFinancialEngineering返回目录返回目录7Background 3w At the end of a bidding war, KKR prevailed by offering shareholders $

5、81 per share in cash plus a package of bonds valued at $28. w The day before the first announcement of a possible takeover for RJR Nabisco, its stock had traded at $77.25.w Thus, KKR offered common shareholders a 41% premium over the firms pre-takeover value.w To finance the buyout, KKR increased RJ

6、Rs debt from $5 billion to $29 billion.FinancialEngineering返回目录返回目录8Background 4w The new firm was structured as a series of holding companies.w Each of these related entities had separate obligations, issued either in conjunction with the acquisition or, in the case of RJR Nabisco, Inc, the operati

7、ng company, carried over from the taken-over firm.FinancialEngineering返回目录返回目录9Part Two: Description of SecuritiesFinancialEngineering返回目录返回目录10Issuancew In May 1989, RJR holdings Capital Corporation issued three nearly identical debt securities in connection with the leveraged buyout of RJR Nabisco

8、 by KKR$1.0 billion of 15-percent payment-in-kind subordinated debentures due 2001 (pay-in-kind bond)$4.1 billion of subordinated discount debentures due 2001 (deferred-coupon bond)$525 million of 13.5-percent subordinated debentures due 2001 (cash-paying bond)FinancialEngineering返回目录返回目录11Financial

9、Engineering返回目录返回目录12FinancialEngineering返回目录返回目录13Differencew The major difference among the three securities is the form in which interest is paid.FinancialEngineering返回目录返回目录14The difference 1w The 13.5-percent cash-paying bond pays interest in cash.w The bankruptcy claim of the cash-paying bond

10、is par plus accrued interest.FinancialEngineering返回目录返回目录15The difference 2w After May 15, 1994, the deferred-coupon and pay-in-kind bonds become identical 15-percent cash-paying bonds.w Prior to May 16, 1994, interest on the 15-percent pay-in-kind bond may, at the option of RJR, be paid either in c

11、ash or through the issuance of additional pay-in-kind bonds valued at 100 percent of par.w The bankruptcy claim of the pay-in-kind bond is par plus accrued interest.FinancialEngineering返回目录返回目录16The difference 3w The deferred-coupon bond was issued on May 15, 1989, at a price of $48.656 per $100 of

12、face value.w Through May 15, 1994, the deferred-coupon bond pays no coupon but accretes to face value on May 15, 1994, at a rate of 15 percent per year, compounded semiannually.w Prior to May 15, 1994, the bankruptcy claim of the deferred-coupon bond is its accreted value. FinancialEngineering返回目录返回

13、目录17FinancialEngineering返回目录返回目录18The difference 4w The deferred-coupon bond and pay-in-kind bonds trade flat (i.e., without accrued interest due upon settlement) prior to May 15, 1994, while the settlement price of these two bonds is the quoted price plus accrued interest after May 15, 1994.w The s

14、ettlement price of the 13.5-percent cash-paying bond is always its quoted price plus accrued interest.FinancialEngineering返回目录返回目录19Part Three: Theoretical Pricing RestrictionsFinancialEngineering返回目录返回目录20Notationw Assumption: there are no market imperfections.w We denote the quoted price (per $100

15、 of face value) at time t of the cash-paying bond by the deferred-coupon bond bythe pay-in-kind bond byw We let vt denote the settlement price (i.e., the quoted price plus accrued interest ) at time t of a bond whose quoted price is pt. ctpdtpptpFinancialEngineering返回目录返回目录21Prior to May 15,1994w Si

16、nce the deferred-coupon and pay-in-kind bonds trade flat prior to May 15, 1994, w for tT*, where T* is May 15, 1994. ddttppttvpvpFinancialEngineering返回目录返回目录22After May 15, 1994w After May 15, 1994, both the deferred-coupon and pay-in-kind bonds become identical 15-percent cash-paying bonds. w In ad

17、dition to paying a lower coupon, the 13.5-percent cash-paying bond also has a lower call-price schedule (see table 2) than either the deferred-coupon or pay-in-kind bonds. w As a result, the following arbitrage restriction must hold after May 15, 1994:w where the inequality assumed the absence of re

18、financing costs.*(1)cdptttvvvfor tTFinancialEngineering返回目录返回目录231. Deferred-coupon and cash-paying bondsw Consider a portfolio consisting of one deferred-coupon bond and U.S. Treasury strips with face values of $6.75 that mature at each of the coupon payment dates through May 15, 1994.FinancialEngi

19、neering返回目录返回目录24Cont.w Beyond May 15, 1994, the deferred-coupon bond is more valuable than the cash-paying bond due to its higher coupon and call-price schedule see equation (1).w Prior to May 15, 1994, the portfolio of one deferred-coupon bond plus treasury strips has the same promised payments as the