Finance Case 1 Babes-N-Toyland

| August 14, 2017

Case 1 Babes-N-Toyland1. Using the data provided in Table 1, construct the yield curves for August 1991, August 1992, and November 1992.2. Evaluate the change in the shape of the yield curve between (a) August 1991 and August 1992, and (b) August 1992 and November 1992 using expectations theory and market segmentation theory.3. Calculate the one-year forward rates of interest implied by the November 1992 yield curve over the period 1993-2002.4. Using these 1 year forward rates, calculate the expected annual inflation rate in each of the next 10 years, and use this rate to obtain the average rate of price appreciation over the 1993 to 2002 period. Assume expectations, knominal = kreal + expected inflation premium5. Examine the information provided in Table 2. Do these data lead you to believe that the annual inflation rate you calculated in Q 4 might be incorrect? Why or why not?6. Using the data provided in Tables 1 and 2 prepare a revised estimate of (a) the one-year forward interest rates implied by the November 1992 yield curve over the 1993-2002 period, and the expected inflation rate in each of these years.b-)Find the inflation rates as the difference between the nominal rates (answers) to 6a.7. How would the yield curve for an AAA rated firm, a B-rated firm, and a C-rated firm, differ from the Treasury security yield curve you constructed in # 1?8. In Question 1 you constructed a series of yield curves using Treasury security yields, while in Question 7 you constructed yield curves using the term structure of interest rates for various classes of risky debt. in most cases, financial analysts prefer the former approach to yield curve construction. Why it is better to construct the yield curve using the term structure of returns drawn from Treasury securities rather than risky corporate bonds?9. Can you use the information in the case to estimate Babes-N-Toyland’s bond rating?10.If Babes-N-Toyland issues 10-year corporate bonds to funds its expansion plans and these bonds are prices to sell at par in the market, what is the semi-annual coupon payment that the form must offer its bondholders? 11.Based on your answers to Questions 1 through 10, is now a good time for Babes-N-Toyland to issue a large quantity of long-term debt securities? Why or why not?

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