A Call to Guernseyby Professor Ian H. Giddy
New York University
You are the assistant manager of the international bond syndicate desk of Crédit Suisse in Zurich. The manager of a Trust in the Channel Islands telephones you. He is interested in investing in a US dollar denominated Eurobond, and wants to get a good yield. You tell him about some new issues that are available, but note that some of them are callable. He says that's okay, as long as he's getting good value for his money. He asks you to fax him a list of bonds currently available.
An hour later he calls you. He has studied the fax and identified three bonds that are satisfactory credits for his Trust and seem to offer decent yields. But he would like your advice in deciding which of the three offers the best value for money.
The three bonds are:
A 4-year Sony Eurodollar bond paying 9.1%, callable at 102 in two years.
A 4-year BASF Eurodollar bond paying 9.3%, callable at 101 in three years.
A 4-year SNCF noncallable Eurodollar bond, paying 8.7%.
All the bonds are priced at par. Please explain the method you would use to compare the value of the three bonds from the investor's point of view. To help you some information about conditions in the bond market and in the Treasury bond options market is given below.