Composite Bond Rate

This YTM estimation approach uses the composite bond rate that we found on Yahoo.Finance.^[5] Composite bond rates are average YTMs for the whole economy calculated by financial analysts. The shortcomings are quite obvious: we use quite irrelevant data of the economy as whole and averaging the YTMs from absolutely different markets. It is clear that different markets have different natural required rates of return and, moreover, their current states may differ dramatically. It is impossible to earn on one market as much as can be easily earned on the other market with higher rates of return. Therefore comparing YTM with average does not give us real information about the fair value and the market’s perception of these securities.

But still composite rates compared to YTMs can show us the position of these bonds on the market. From the investors’ standpoint, we would say, doesn’t matter from what industry bond to invest, especially for the investment-grade bonds and therefore can show whether are they overestimated or underestimated compared to the composite rates of same credit rating and similar maturity date.

We obtained the following results:

Table 6 Composite rates compared to YTMs

We can see that from the fair value obtained using composite rate approach the market price is overestimated. It can be explained by the stable position of Disney on the media market and shift of the reliability of Disney’s bonds in the side of the “AA” bonds, since that they are perceived as more reliable than average “A” bonds.

Date: 2015-01-29; view: 993