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

#	Maturity date	Market YTM, %	Market price, $	Composite rate, %	Fair value, $
1	6/20/2014	0.114	115.51	0.83	108.42
2	8/16/2016	1.02	101.51	1.72	98.66
3	9/15/2016	1.189	120.59	1.72	114.37
4	3/15/2019	2.097	122.89	-6	-
5	6/1/2021	2.19	113.31	2.61%	108.67
6	8/16/2021	2.383	103.16	2.61%	101.09
7	3/1/2032	3.577	149.01	3.93%	141.22

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.

Conclusion

At the first sight, it is rather surprising to see the weighted average YTM of 1.83%. However, it is quite typical to have these low YTM for the robust international firm originating from USA. We see that Disney has quite high credit rating of “A” and, therefore, default risk premium is very low for it. Disney is especially prone to get low YTMs because of its long history and special position in the media market.⁷ However, in the case of Disney we still observe the growth of YTM across the time to maturity which applies to all firms.

One more question arises here. If the YTM is so low, why do not obtain the majority of loans via bonds rather than bank loans? Other loans than bonds appear at Disney’s balance sheet. The typical credit rate even for such stable companies like Disney are higher than 2—3% and can reach 5% or more. This can be explained as follows: issuing bonds is a long and resources-consuming procedure, and cash inflow does not follow immediately. Moreover, a corporation incurs floatation costs related to issuing bonds that may be rather high, so the real cost of bond debt may be higher than provided above. It follows that for most short term projects it is easier to obtain bank loans than to issue new bonds.

From the analysis of the fair value we can say that Disney’s bonds are quite robust and more stable than average “A” bonds because of the prominent and steady position of Disney in the industry and also that Disney’s bonds are fairly valued by the market.